**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended September 30,2003**

 

**OR**

 

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

 

**Forthe transition period from                                             to                                             **

 

**Commissionfile number   0-14289**

 

| **GREENE  COUNTY BANCSHARES, INC.**                                                |
|------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                             |
|                                                                               |   |   |
| **Tennessee**                                                                      |   | **62-1222567** |
| (State or other jurisdiction of  incorporation or organization)                    |   | (I.R.S. Employer Identification No.) |
|                                                                               |   |   |
| **100 North Main Street, Greeneville, Tennessee**                                  |   | **37743-4992** |
| (Address of principal executive offices)                                           |   | (Zip Code) |
|                                                                               |   |   |
| Registrant’s telephone number, including area code:  **(423) 639-5111**. |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  YES  ý  NO  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)YES  ý  NO  o

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 6,823,315.

 

 

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**PART 1 – FINANCIALINFORMATION**

 

# **ITEM 1.**                             FINANCIAL STATEMENTS

 

The unaudited condensedconsolidated financial statements of the Registrant and its wholly ownedsubsidiaries are as follows:

 

Condensed Consolidated Balance Sheets -September 30, 2003 and December 31, 2002.

 

Condensed Consolidated Statements of Incomeand Comprehensive Income - For the three and nine months ended September 30,2003 and 2002.

 

Condensed Consolidated Statement ofStockholders’ Equity - For the nine months ended September 30, 2003.

 

Condensed Consolidated Statements of CashFlows - For the nine months ended September 30, 2003 and 2002.

 

Notes to Condensed Consolidated FinancialStatements.

 

1

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**GREENE COUNTYBANCSHARES, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**September 30, 2003and December 31, 2002**

**(Dollar amounts in thousands, except shareand per share data)**

** **
|                                                                                            |   | **September  30,  2003** |    | **December  31,  2002*** |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------|---------|--------------------------|--------|
|                                                                                            |   | **(Unaudited)**          |    |                     |   |
|                                                                                            |   |                     |    |                     |   |
| **ASSETS**                                                                                      |   |                     |    |                     |   |
| Cash and due from banks                                                                         |   | $                        | 31,239  |                     | $      | 23,466 |   |
| Federal funds sold                                                                              |   | —                   |    | 39,493                   |   |
| Securities available for sale                                                                   |   | 22,168                   |    | 33,322                   |   |
| Securities held to maturity (fair value  $456 and $455)                                         |   | 448                      |    | 448                      |   |
| FHLB, Bankers Bank and other stock, at cost                                                     |   | 5,493                    |    | 4,744                    |   |
| Loans held for sale                                                                             |   | 3,842                    |    | 6,646                    |   |
| Loans                                                                                           |   | 808,638                  |    | 750,257                  |   |
| Less: Allowance for loan losses                                                                 |   | (12,814                  | )       | (12,586                  | )      |
| Net loans                                                                                       |   | 795,824                  |    | 737,671                  |   |
| Premises and equipment, net                                                                     |   | 27,980                   |    | 26,377                   |   |
| Other assets                                                                                    |   | 27,087                   |    | 27,229                   |   |
|                                                                                            |   |                     |    |                     |   |
| Total assets                                                                                    |   | $                        | 914,081 |                     | $      | 899,396 |   |
|                                                                                            |   |                     |    |                     |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                   |   |                     |    |                     |   |
| Liabilities                                                                                     |   |                     |    |                     |   |
| Deposits                                                                                        |   | $                        | 704,499 |                     | $      | 719,323 |   |
| Federal funds purchased and repurchase  agreements                                              |   | 20,520                   |    | 10,038                   |   |
| Notes payable                                                                                   |   | 89,066                   |    | 82,359                   |   |
| Trust preferred debt                                                                            |   | 10,000                   |    | —                   |   |
| Accrued interest payable and other  liabilities                                                 |   | 10,274                   |    | 13,081                   |   |
| Total liabilities                                                                               |   | 834,359                  |    | 824,801                  |   |
|                                                                                            |   |                     |    |                     |   |
| Shareholders’ equity                                                                       |   |                     |    |                     |   |
| Common stock: $2 par, 15,000,000 shares  authorized, 6,823,315 and 6,820,540 shares outstanding |   | 13,647                   |    | 13,641                   |   |
| Additional paid-in capital                                                                      |   | 4,901                    |    | 4,870                    |   |
| Retained earnings                                                                               |   | 60,991                   |    | 55,928                   |   |
| Accumulated other comprehensive income                                                          |   | 183                      |    | 156                      |   |
| Total shareholders’ equity                                                                 |   | 79,722                   |    | 74,595                   |   |
|                                                                                            |   |                     |    |                     |   |
| Total liabilities and shareholders’ equity                                                 |   | $                        | 914,081 |                     | $      | 899,396 |   |

 

----

* Condensed from auditedfinancial statements.

 

See accompanying notes.

 

2

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**GREENE COUNTYBANCSHARES, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**

**Three and Nine MonthsEnded September 30, 2003 and 2002**

**(Dollar amounts inthousands, except share and per share data)**

 
|                                                 |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                 |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                                 |   | **(Unaudited)**                        |   | **(Unaudited)**                       |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Interest income                                      |   |                                   |   |                                  |   |   |   |   |   |
| Interest and fees on loans                           |   | $                                      | 13,603 |                                  | $      | 14,757 |   | $ | 40,942 |   | $ | 43,450 |   |
| Investment securities                                |   | 117                                    |   | 364                                   |   | 761 |   | 1,187 |   |
| Federal funds sold and  interest-earning deposits    |   | 143                                    |   | 53                                    |   | 242 |   | 425 |   |
|                                                 |   | 13,863                                 |   | 15,174                                |   | 41,945 |   | 45,062 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Interest expense                                     |   |                                   |   |                                  |   |   |   |   |   |
| Deposits                                             |   | 2,856                                  |   | 3,600                                 |   | 9,610 |   | 11,601 |   |
| Borrowings                                           |   | 850                                    |   | 906                                   |   | 2,320 |   | 2,617 |   |
|                                                 |   | 3,706                                  |   | 4,506                                 |   | 11,930 |   | 14,218 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Net interest income                                  |   | 10,157                                 |   | 10,668                                |   | 30,015 |   | 30,844 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Provision for loan losses                            |   | 1,655                                  |   | 1,354                                 |   | 4,510 |   | 4,030 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Net interest income after provision for  loan losses |   | 8,502                                  |   | 9,314                                 |   | 25,505 |   | 26,814 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Noninterest income                                   |   |                                   |   |                                  |   |   |   |   |   |
| Service charges and fees                             |   | 2,388                                  |   | 2,079                                 |   | 6,919 |   | 5,947 |   |
| Other                                                |   | 572                                    |   | 457                                   |   | 1,662 |   | 1,748 |   |
|                                                 |   | 2,960                                  |   | 2,536                                 |   | 8,581 |   | 7,695 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Noninterest expense                                  |   |                                   |   |                                  |   |   |   |   |   |
| Salaries and employee benefits                       |   | 3,997                                  |   | 4,326                                 |   | 12,086 |   | 12,866 |   |
| Occupancy and furniture and equipment  expense       |   | 1,184                                  |   | 968                                   |   | 3,357 |   | 3,001 |   |
| Other                                                |   | 2,198                                  |   | 1,974                                 |   | 6,860 |   | 5,709 |   |
|                                                 |   | 7,379                                  |   | 7,268                                 |   | 22,303 |   | 21,576 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Income before income taxes                           |   | 4,083                                  |   | 4,582                                 |   | 11,783 |   | 12,933 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Provision for income taxes                           |   | 1,483                                  |   | 1,777                                 |   | 4,264 |   | 4,892 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Net income                                           |   | $                                      | 2,600  |                                  | $      | 2,805 |   | $ | 7,519 |   | $ | 8,041 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Comprehensive Income                                 |   | $                                      | 2,550  |                                  | $      | 2,824 |   | $ | 7,546 |   | $ | 8,152 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Per share of common stock:                           |   |                                   |   |                                  |   |   |   |   |   |
| Basic earnings                                       |   | $                                      | 0.38   |                                  | $      | 0.41 |   | $ | 1.10 |   | $ | 1.18 |   |
| Diluted earnings                                     |   | 0.38                                   |   | 0.41                                  |   | 1.09 |   | 1.18 |   |
| Dividends                                            |   | 0.12                                   |   | 0.12                                  |   | 0.36 |   | 0.36 |   |
|                                                 |   |                                   |   |                                  |   |   |   |   |   |
| Weighted average shares outstanding:                 |   |                                   |   |                                  |   |   |   |   |   |
| Basic                                                |   | 6,823,315                              |   | 6,820,540                             |   | 6,822,040 |   | 6,819,446 |   |
| Diluted                                              |   | 6,894,097                              |   | 6,839,393                             |   | 6,893,420 |   | 6,838,749 |   |

 

See accompanying notes.

 

3

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**GREENE COUNTYBANCSHARES, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**For Nine Months EndedSeptember 30, 2003**

**(Dollar amounts inthousands, except share and per share data)**

 
|                                                          |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Compre-  Hensive  Income** |   | **Total  Share-  Holders’  Equity** |   |
|---------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|------------------------|--------|--------------------------------------------------|--------|------------------------------------------|--------|
|                                                          |   | **(Unaudited)**   |
|                                                          |   |              |   |                             |   |                   |   |                                             |   |                                     |   |
| **Balance, January 1, 2003**                                  |   | $                 | 13,641 |                             | $      | 4,870                  |   | $                                                | 55,928 |                                     | $      | 156 |   | $ | 74,595 |   |
|                                                          |   |              |   |                             |   |                   |   |                                             |   |                                     |   |
| Issuance of 2,775 shares                                      |   | 6                 |   | 31                               |   | —                 |   | —                                           |   | 37                                       |   |
| Dividends paid ($.36 per share)                               |   | —            |   | —                           |   | (2,456                 | )      | —                                           |   | (2,456                                   | )      |
| Comprehensive income:                                         |   |              |   |                             |   |                   |   |                                             |   |                                     |   |
| Net income                                                    |   | —            |   | —                           |   | 7,519                  |   | —                                           |   | 7,519                                    |   |
| Change in unrealized gains (losses), net of  reclassification |   | —            |   | —                           |   | —                 |   | 27                                               |   | 27                                       |   |
| Total comprehensive income                                    |   |              |   |                             |   |                   |   |                                             |   | 7,546                                    |   |
|                                                          |   |              |   |                             |   |                   |   |                                             |   |                                     |   |
| **Balance, September 30, 2003**                               |   | $                 | 13,647 |                             | $      | 4,901                  |   | $                                                | 60,991 |                                     | $      | 183 |   | $ | 79,722 |   |

 

See accompanying notes.

 

4

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**GREENE COUNTYBANCSHARES, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Nine MonthsEnded September 30, 2003 and 2002**

**(Dollar amounts inthousands, except share and per share data)**

 
|                                                                                       |   | **September  30,  2003** |       | **September  30,  2002** |       |
|--------------------------------------------------------------------------------------------|--------|-------------------------------|------------|--------------------------|------------|
|                                                                                       |   | **(Unaudited)**               |       |
|                                                                                       |   |                          |       |                     |       |
| **Cash flows from operating activities**                                                   |   |                          |       |                     |       |
| Net income                                                                                 |   | $                             | 7,519      |                     | $          | 8,041 |   |
| Adjustments to reconcile net income to net  cash from Operating activities                 |   |                          |       |                     |       |
| Provision for loan losses                                                                  |   | 4,510                         |       | 4,030                    |       |
| Depreciation and amortization                                                              |   | 1,519                         |       | 1,412                    |       |
| Security amortization and accretion, net                                                   |   | 113                           |       | 16                       |       |
| FHLB stock dividends                                                                       |   | (139                          | )          | (155                     | )          |
| Net gain on sale of mortgage loans                                                         |   | (927                          | )          | (362                     | )          |
| Originations of mortgage loans held for  sale                                              |   | (61,460                       | )          | (39,137                  | )          |
| Proceeds from sales of mortgage loans                                                      |   | 65,190                        |       | 43,744                   |       |
| Net (gain) losses on sales of fixed assets                                                 |   | 104                           |       | (103                     | )          |
| Net (gain) loss on OREO and repossessed  assets                                            |   | 199                           |       | 181                      |       |
| Net changes:                                                                               |   |                          |       |                     |       |
| Accrued interest receivable and other  assets                                              |   | 245                           |       | (131                     | )          |
| Accrued interest payable and other  liabilities                                            |   | (2,808                        | )          | 1,064                    |       |
| Net cash from operating activities                                                         |   | 14,065                        |       | 18,600                   |       |
|                                                                                       |   |                          |       |                     |       |
| **Cash flows from investing activities**                                                   |   |                          |       |                     |       |
| Net change in interest-bearing deposits  with banks                                        |   | —                        |       | 1,100                    |       |
| Net change in securities and other  interest-earning investments                           |   | 10,475                        |       | (4,975                   | )          |
| Increase in cash surrender value of life  insurance                                        |   | (561                          | )          | (1,101                   | )          |
| Net increase in loans                                                                      |   | (67,104                       | )          | (52,324                  | )          |
| Improvements to other real estate and  proceeds from sales of other real estate owned, net |   | 4,564                         |       | 3,401                    |       |
| Proceeds from sale of fixed assets and  fixed asset additions, net                         |   | (3,104                        | )          | (1,274                   | )          |
| Net cash used in investing activities                                                      |   | (55,730                       | )          | (55,173                  | )          |
|                                                                                       |   |                          |       |                     |       |
| **Cash flows from financing activities**                                                   |   |                          | ** ** |                     | ** ** |
| Net change in deposits                                                                     |   | (14,825                       | )          | 11,137                   |       |
| Net change in federal funds purchased and  repurchase agreements                           |   | 10,482                        |       | 5,891                    |       |
| Net change in notes payable                                                                |   | 6,707                         |       | (549                     | )          |
| Issuance of trust preferred debt                                                           |   | 10,000                        |       | —                   |       |
| Dividends paid                                                                             |   | (2,456                        | )          | (2,455                   | )          |
| Proceeds from issuance of common stock                                                     |   | 37                            |       | 16                       |       |
| Net cash from financing activities                                                         |   | 9,945                         |       | 14,040                   |       |
|                                                                                       |   |                          |       |                     |       |
| **Net change in cash and cash equivalents**                                                |   | (31,720                       | )          | (22,533                  | )          |
|                                                                                       |   |                          |       |                     |       |
| Cash and cash equivalents, beginning of  period                                            |   | 62,959                        |       | 48,053                   |       |
|                                                                                       |   |                          |       |                     |       |
| **Cash and cash equivalents, end of period**                                               |   | $                             | 31,239     |                     | $          | 25,520 |   |

 

See accompanying notes.

 

5

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**GREENE COUNTY BANCSHARES, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**September 30, 2003**

**Unaudited**

**(Dollar amounts in thousands, except shareand per share data)**

 

**NOTE 1– PRINCIPLES OF CONSOLIDATION**

 

The accompanying unauditedcondensed consolidated financial statements of Greene County Bancshares, Inc.(the “Company”) and its wholly owned subsidiary, Greene County Bank (the“Bank”), have been prepared in accordance with accounting principles generallyaccepted in the United States of America for interim information and in accordancewith the instructions to Form 10-Q and Article 10 of Regulation S-X aspromulgated by the Securities and Exchange Commission. Accordingly, they do notinclude all the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. Operating results for the three and nine months ended September 30,2003 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2003. For further information, refer to theconsolidated financial statements and footnotes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002. Certainamounts from prior period financial statements have been reclassified toconform to the current year’s presentation.

# ** **

# ** **

# **NOTE2 – STOCK COMPENSATION**

 

Employee compensation expenseunder stock option plans is reported if options are granted below market priceat grant date, whereas expense for options granted at market price are reportedon a pro forma basis.  Pro formadisclosures of net income and earnings per share are shown below using the fairvalue method of SFAS No. 123 to measure expense for options using theBlack-Scholes option pricing model to estimate fair value.

 

The following disclosures showthe effect on income and earnings per share had the options’ fair value beenrecorded using an option pricing model.

 
|                       |   | **Three  Months Ended September 30,** |   |
|----------------------------|--------|---------------------------------------|--------|
|                       |   | **2003**                              |   | **2002** |   |
|                       |   | **As  Reported**                      |   | **Proforma** |   | **As  Reported** |   | **Proforma** |   |
|                       |   |                                  |   |   |   |   |   |   |   |
| Net income                 |   | $                                     | 2,600  |   | $ | 2,571 |   | $ | 2,805 |   | $ | 2,783 |   |
| Basic earnings per share   |   | $                                     | 0.38   |   | $ | 0.37 |   | $ | 0.41 |   | $ | 0.41 |   |
| Diluted earnings per share |   | $                                     | 0.38   |   | $ | 0.37 |   | $ | 0.41 |   | $ | 0.41 |   |

 

 
|                       |   | **Nine  Months Ended September 30,** |   |
|----------------------------|--------|--------------------------------------|--------|
|                       |   | **2003**                             |   | **2002** |   |
|                       |   | **As  Reported**                     |   | **Proforma** | ** ** | **As  Reported** | ** ** | **Proforma** | ** ** |
|                       |   |                                 |   |   |   |   |   |   |   |
| Net income                 |   | $                                    | 7,519  |   | $ | 7,433 |   | $ | 8,041 |   | $ | 7,973 |   |
| Basic earnings per share   |   | $                                    | 1.10   |   | $ | 1.08 |   | $ | 1.18 |   | $ | 1.18 |   |
| Diluted earnings per share |   | $                                    | 1.09   |   | $ | 1.07 |   | $ | 1.18 |   | $ | 1.17 |   |

# ** **

6

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# **NOTE3 – ALLOWANCE FOR LOAN LOSSES**

 

Transactionsin the allowance for loan losses for the nine months ended September 30, 2003and twelve months ended December 31, 2002 were as follows:

 
|                         |   | **September  30,  2003** |   | **December  31,  2002** |   |
|------------------------------|--------|-------------------------------|--------|-------------------------|--------|
|                         |   |                          |   |                    |   |
| Balance at beginning of year |   | $                             | 12,586 |                    | $      | 11,221 |   |
| Add (deduct):                |   |                          |   |                    |   |
| Charge-offs                  |   | (5,460                        | )      | (7,648                  | )      |
| Recoveries                   |   | 1,178                         |   | 1,948                   |   |
| Provisions                   |   | 4,510                         |   | 7,065                   |   |
| Ending balance               |   | $                             | 12,814 |                    | $      | 12,586 |   |

 
|                                    |   | **September  30,  2003** |   | **December  31,  2002** |   |
|-----------------------------------------|--------|--------------------------|--------|-------------------------|--------|
|                                    |   |                     |   |                    |   |
| Loans past due 90 days still on accrual |   | $                        | 236    |                    | $      | 307 |   |
| Nonaccrual loans                        |   | 4,444                    |   | 7,475                   |   |
| Total                                   |   | $                        | 4,680  |                    | $      | 7,782 |   |

 

# **NOTE4 – TRUST PREFERRED DEBT**

 

In September2003, the Company formed Greene County Capital Trust I (“GC Trust”).  GC Trust is a statutory business trustformed under the laws of the state of Delaware and is wholly owned by the Company.  In September 2003, the Trust issued variablerate preferred securities with an aggregate liquidation amount of $10,000,000($1,000 per preferred security) to a third-party investor.  The Company then issued variable rate juniordebentures aggregating $10,310,000 to GC Trust.  The junior subordinated debentures are the sole assets of GCTrust.  The junior subordinateddebentures and the preferred securities pay interest and dividends,respectively, on a quarterly basis.  Thevariable interest rate is the three-month LIBOR plus 2.85% adjusted quarterly(3.99% at September 30, 2003). These junior subordinated debentures will mature in 2033, at which timethe preferred securities must be redeemed. The junior subordinated debentures and preferred securities can beredeemed contemporaneously, in whole or in part, beginning October 8, 2008 at aredemption price of $1,000 per preferred security.

 

The Companyhas provided a full, irrevocable, and unconditional guarantee on a subordinatedbasis of the obligations of GC Trust under the preferred securities in theevent of the occurrence of an event of default, as defined in suchguarantee.  Debt issuance cost andunderwriting fees of $40,000 were capitalized related to the offering and arebeing amortized over the estimated life of the junior subordinateddebentures.  The trust agreementcontains provisions that enable the Company to defer making interest paymentsfor a period of up to five years.

# ** **

7

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**NOTE5 – EARNINGS PER SHARE OF COMMON STOCK**

 

Basic earnings per share (EPS)of common stock is computed by dividing net income by the weighted averagenumber of common shares outstanding during the period. Diluted earnings pershare of common stock is computed by dividing net income by the weightedaverage number of common shares and potential common shares outstanding duringthe period. Stock options are regarded as potential common shares. Potentialcommon shares are computed using the treasury stock method. For the three andnine months ended September 30, 2003, 70,105 options are excluded from theeffect of dilutive securities because they are anti-dilutive; 113,870 optionsare similarly excluded from the effect of dilutive securities for the three andnine months ended September 30, 2002.

 

The following is areconciliation of the numerators and denominators used in the basic and dilutedearnings per share computations for the three and six months ended June 30,2003 and 2002:

 
|                                                              |   | **Three  Months Ended September 30,** |   |
|-------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                              |   | **2003**                              |   | **2002** |   |
|                                                              |   | **Income  (Numerator)**               |   | **Shares  (Denominator)** |   | **Income  (Numerator)** |   | **Shares  (Denominator)** |   |
|                                                              |   |                                  |   |   |   |   |   |   |   |
| **Basic EPS**                                                     |   |                                  |   |   |   |   |   |   |   |
| Income available to common shareholders                           |   | $                                     | 2,600  |   | 6,823,315 |   | $ | 2,805 |   | 6,820,540 |   |
|                                                              |   |                                  |   |   |   |   |   |   |   |
| **Effect of dilutive securities**                                 |   |                                  |   |   |   |   |   |   |   |
| Stock options outstanding                                         |   | —                                |   | 70,782 |   | — |   | 18,853 |   |
|                                                              |   |                                  |   |   |   |   |   |   |   |
| **Diluted EPS**                                                   |   |                                  |   |   |   |   |   |   |   |
| Income available to common shareholders  plus assumed conversions |   | $                                     | 2,600  |   | 6,894,097 |   | $ | 2,805 |   | 6,839,393 |   |

 

 
|                                                              |   | **Nine  Months Ended September 30,** |       |
|-------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                              |   | **2003**                             |       | **2002** |   |
|                                                              |   | **Income  (Numerator)**              |       | **Shares  (Denominator)** |   | **Income  (Numerator)** |   | **Shares  (Denominator)** | ** ** |
|                                                              |   |                                 | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Basic EPS**                                                     |   |                                 |       |   |   |   |   |   |   |
| Income available to common shareholders                           |   | $                                    | 7,519      |   | 6,822,040 |   | $ | 8,041 |   | 6,819,446 |   |
|                                                              |   |                                 |       |   |   |   |   |   |   |
| **Effect of dilutive securities**                                 |   |                                 |       |   |   |   |   |   |   |
| Stock options outstanding                                         |   | —                               |       | 71,380 |   | — |   | 19,303 |   |
|                                                              |   |                                 |       |   |   |   |   |   |   |
| **Diluted EPS**                                                   |   |                                 |       |   |   |   |   |   |   |
| Income available to common shareholders  plus assumed conversions |   | $                                    | 7,519      |   | 6,893,420 |   | $ | 8,041 |   | 6,838,749 |   |

 

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**NOTE6 – SEGMENT INFORMATION**

 

The Company’s operatingsegments include banking, mortgage banking, consumer finance, subprimeautomobile lending and title insurance. The reportable segments are determinedby the products and services offered, and internal reporting. Loans,investments, and deposits provide the revenues in the banking operation, loansand fees provide the revenues in consumer finance, mortgage banking, andsubprime lending and insurance commissions provide revenues for the titleinsurance company. Consumer finance, subprime automobile lending and titleinsurance do not meet the quantitative threshold on an individual basis, andare therefore shown below in “other”. Mortgage banking operations are includedin “Bank”.   All operations aredomestic.

 

Segment performance isevaluated using net interest income and noninterest income. Income taxes areallocated based on income before income taxes and indirect expenses (includesmanagement fees) are allocated based on time spent for each segment.Transactions among segments are made at fair value. Information reportedinternally for performance assessment follows.

 
| **Three months ended September  30, 2003** |   | **Bank** |    | **Other** |   | **Total** |   |
|-------------------------------------------------|--------|----------|---------|-----------|--------|-----------|--------|
|                                            |   |     |    |      |   |      |   |
| Net interest income                             |   | $        | 8,518   |      | $      | 1,639     |   | $ | 10,157 |   |
| Provision for loan losses                       |   | 1,099    |    | 556       |   | 1,655     |   |
| Noninterest income                              |   | 2,590    |    | 370       |   | 2,960     |   |
| Noninterest expense                             |   | 6,133    |    | 1,246     |   | 7,379     |   |
| Income tax expense                              |   | 1,387    |    | 96        |   | 1,483     |   |
| **Segment profit**                              |   | $        | 2,489   |      | $      | 111       |   | $ | 2,600 |   |
|                                            |   |     |    |      |   |      |   |
| **Segment assets at September 30, 2003**        |   | $        | 869,200 |      | $      | 44,881    |   | $ | 914,081 |   |

 
| **Three  months ended September 30, 2002** |   | **Bank** |    | **Other** |   | **Total** | ** ** |
|--------------------------------------------|--------|----------|---------|-----------|--------|-----------|------------|
|                                       |   |     |    |      |   |      |       |
| Net interest income                        |   | $        | 9,054   |      | $      | 1,614     |       | $ | 10,668 |   |
| Provision for loan losses                  |   | 756      |    | 598       |   | 1,354     |       |
| Noninterest income                         |   | 2,412    |    | 124       |   | 2,536     |       |
| Noninterest expense                        |   | 5,979    |    | 1,289     |   | 7,268     |       |
| Income tax expense                         |   | 1,761    |    | 16        |   | 1,777     |       |
| **Segment profit**                         |   | $        | 2,970   |      | $      | (165      | )          | $ | 2,805 |   |
|                                       |   |     |    |      |   |      |       |
| **Segment assets at September 30, 2002**   |   | $        | 797,707 |      | $      | 37,162    |       | $ | 834,869 |   |

 
| **Nine  months ended September 30, 2003** |   | **Bank** |    | **Other** |   | **Total** | ** ** |
|-------------------------------------------|--------|----------|---------|-----------|--------|-----------|------------|
|                                      |   |     |    |      |   |      |       |
| Net interest income                       |   | $        | 25,141  |      | $      | 4,874     |       | $ | 30,015 |   |
| Provision for loan losses                 |   | 2,865    |    | 1,645     |   | 4,510     |       |
| Noninterest income                        |   | 7,473    |    | 1,108     |   | 8,581     |       |
| Noninterest expense                       |   | 18,633   |    | 3,670     |   | 22,303    |       |
| Income tax expense                        |   | 4,009    |    | 255       |   | 4,264     |       |
| **Segment profit**                        |   | $        | 7,107   |      | $      | 412       |       | $ | 7,519 |   |
|                                      |   |     |    |      |   |      |       |
| **Segment assets at September 30, 2003**  |   | $        | 869,200 |      | $      | 44,881    |       | $ | 914,081 |   |

 
| **Nine  months ended September 30, 2002** |   | **Bank** |    | **Other** |   | **Total** | ** ** |
|-------------------------------------------|--------|----------|---------|-----------|--------|-----------|------------|
|                                      |   |     |    |      |   |      |       |
| Net interest income                       |   | $        | 25,916  |      | $      | 4,928     |       | $ | 30,844 |   |
| Provision for loan losses                 |   | 1,389    |    | 2,641     |   | 4,030     |       |
| Noninterest income                        |   | 6,847    |    | 848       |   | 7,695     |       |
| Noninterest expense                       |   | 18,025   |    | 3,551     |   | 21,576    |       |
| Income tax expense                        |   | 5,036    |    | (144      | )      | 4,892     |       |
| **Segment profit**                        |   | $        | 8,313   |      | $      | (272      | )          | $ | 8,041 |   |
|                                      |   |     |    |      |   |      |       |
| **Segment assets at September 30, 2002**  |   | $        | 797,707 |      | $      | 37,162    |       | $ | 834,869 |   |

# ** **

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# **ITEM 2.**                          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

 

**Forward-LookingStatements**

 

**This Quarterly Reporton Form 10-Q, including all documents incorporated herein by reference,contains forward-looking statements. Additional written or oral forward-lookingstatements may be made by the Company from time to time in filings with theSecurities and Exchange Commission or otherwise. The words “believe”, “expect”,“seek”, and “intend” and similar expressions identify forward-lookingstatements, which speak only as of the date the statement is made. Suchforward-looking statements are within the meaning of that term in Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. Such statements may include, but are not limitedto, projections of income or loss, expenditures, acquisitions, plans for futureoperations, financing needs or plans relating to services of the Company, aswell as assumptions relating to the foregoing. Forward-looking statements areinherently subject to risks and uncertainties, some of which cannot bepredicted or quantified. Future events and actual results could differmaterially from those set forth in, contemplated by or underlying theforward-looking statements.**

 

**Presentationof Amounts**

 

**All dollar amountsset forth below, other than per-share amounts and percentages, are in thousandsunless otherwise 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. In addition to its commercial bankingoperations, the Bank conducts separate businesses through its threewholly-owned subsidiaries: Superior Financial Services, Inc. (“Superior Financial”),a consumer finance company; GCB Acceptance Corporation (“GCB Acceptance”), asubprime automobile lending company; and Fairway Title Co., a title companyformed in 1998. The Bank also operates a mortgage banking operation through itsmain office in Knox County, Tennessee and it also has representatives locatedthrough out the Company’s branch system. At September 30, 2003, the Company hadassets of $914 million and operated 39 branches throughout East Tennessee, abranch in North Carolina, a trust services office in Middle Tennessee and oneloan production office in the southwestern part of Virginia.

 

On June 18,2003, the Company announced that it had agreed to acquire Gallatin,Tennessee-based Independent Bankshares Corporation (“IBC”), in a mergertransaction which will create a bank holding company with combined assets ofapproximately $1.1 billion. The Company will be the surviving corporation afterthe merger is completed. IBC is a bank holding company for First IndependentBank, which has four offices in Gallatin and Hendersonville, Tennessee, andRutherford Bank and Trust, with three offices in Murfreesboro and Smyrna,Tennessee.  IBC’s shareholders approvedthe merger at a special meeting on October 16, 2003 and all regulatoryapprovals have been received. Accordingly, the Company expects to complete thetransaction in late November, 2003.

 

**Growth and Business Strategy**

 

The Company expects that, over the intermediate term, a majority of itsgrowth will result from mergers and acquisitions including acquisitions of bothentire financial institutions and selected branches of financial institutions.De novo branching will also be a method of growth, particularly in high-growthand other demographically-desirable markets.

 

The Company’s strategic plan outlines a geographic expansion policywithin a 300-mile radius of its major markets. This policy contemplates theCompany expanding westward and eastward up to and including Nashville,Tennessee and Roanoke, Virginia, respectively, east/southeast up to andincluding 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 andNashville, Tennessee are

 

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highlydesirable areas with respect to expansion and growth plans and the Company hasopened a full-service branch in Knoxville.

 

The Company is continuously investigating and analyzing other lines andareas of business.  These include, butare not limited to, various types of insurance, real estate activities, etc.Conversely, the Company frequently evaluates and analyzes the profitability,risk factors and viability of its various business lines and segments and,depending upon the results of these evaluations and analyses, may conclude toexit certain segments and/or business lines. Further, in conjunction with theseongoing evaluations and analyses, the Company may decide to sell, merge orclose certain branch facilities.

 

**Liquidity and Capital Resources**

 

**Liquidity. **Liquidity refers tothe ability or the financial flexibility to manage future cash flows to meetthe needs of depositors and borrowers and fund operations. Maintainingappropriate levels of liquidity allows the Company to have sufficient fundsavailable for reserve requirements, customer demand for loans, withdrawal ofdeposit balances and maturities of deposits and other liabilities. TheCompany’s liquid assets include investment securities, federal funds sold,loans held for sale, and cash and due from banks. Including securities pledgedto collateralize municipal deposits, these assets represented 7.7% of the totalliquidity base at September 30, 2003, as compared to 13.3% at December 31,2002. The liquidity base is generally defined to include deposits, securitiessold under repurchase agreements and short-term borrowed funds and otherborrowings. In addition, the Company maintains borrowing availability with theFederal Home Loan Bank of Cincinnati (“FHLB”) approximating $13,660 atSeptember 30, 2003. The Company also maintains federal funds lines of credittotaling $80,900 at seven correspondent banks of which $68,900 was available atSeptember 30, 2003. The Company believes it has sufficient liquidity to satisfyits current operating needs.

 

On September25, 2003, the Company completed a $10,000 trust preferred securities offering,as part of a privately placed pool.  Thesecurities, due in 2033, bear interest at a floating rate of 2.85% above thethree-month LIBOR rate, reset quarterly, and are callable in five years withoutpenalty.  The Company expects thecapital raised from the offering will qualify as Tier I capital for regulatorypurposes and intends to use the proceeds of the offering to support its pendingmerger with Independent Bankshares Corporation.

 

For the ninemonths ended September 30, 2003, operating activities of the Company provided$14,065 of cash flows. Net income of $7,519 adjusted for non-cash operatingactivities, including $3,730 in net proceeds from loans originated for sale,$6,142 in provision for loan losses and depreciation and amortization,including premium amortization on securities, net of accretion, of $113,comprised the majority of the cash generated from operations. These increasesin cash flows were offset, in part, by the $2,808 decrease in accrued interestpayable and other liabilities and by the net gain on sale of mortgage loans inthe amount of $927.

 

The Company’snet increase in held-to-maturity loans originated, net of principal collected,used $67,104 in cash flows and was the primary component of the $55,730 in netcash used in investing activities.  Inaddition, the excess of improvements to other real estate and proceeds fromsales of other real estate owned, net, over proceeds from sale of fixed assetsand fixed asset additions, net, provided additional cash flows in the amount of$1,460.  Offsetting, in part, this useof cash flows was the net change in securities and other interest-earninginvestments in the amount of $10,475, resulting primarily from the Company’sissuance of $10,000 in trust preferred securities prior to the end of thequarter.

 

The netincrease in federal funds purchased and repurchase agreements, notes payableand issuance of trust preferred debt provided $10,482, $6,707 and $10,000 incash flows, respectively. Offsetting, in part, these increases in cash flowswere the $14,825 reduction in deposits and quarterly dividends paid in theamount of $2,456.

 

**Capital Resources. **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.

 

Shareholders’equity on September 30, 2003 was $79,722, an increase of $5,127, or 6.9%, from$74,595 on December 31, 2002. The increase in shareholders’ equity primarilyreflected net income for the nine months ended

 

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September 30, 2003 of $7,519($1.09 per share, assuming dilution). This increase was offset by quarterlydividend payments during the nine months ended September 30, 2003 totaling$2,456 ($0.36 per share).

 

The Company’sprimary source of liquidity is dividends paid by the Bank.  Applicable Tennessee statutes andregulations impose restrictions on the amount of dividends that may be declaredby the Bank. Further, any dividend payments are subject to the continuingability of the Bank to maintain its compliance with minimum federal regulatorycapital requirements and to retain its characterization under federalregulations as a “well-capitalized” institution.

 

Risk-basedcapital regulations adopted by the Board of Governors of the Federal ReserveSystem (the “FRB”) and the Federal Deposit Insurance Corporation require bankholding companies and banks, respectively, to achieve and maintain specifiedratios of capital to risk-weighted assets. The risk-based capital rules aredesigned to measure Tier 1 Capital and Total Capital in relation to the creditrisk of both on- and off-balance sheet items. Under the guidelines, one of four risk weights is applied to thedifferent on-balance sheet items. Off-balance sheet items, such as loan commitments, are also subject torisk-weighting after conversion to balance sheet equivalent amounts. All bankholding companies and banks must maintain a minimum total capital to totalrisk-weighted assets ratio of 8.00%, at least half of which must be in the formof core, or Tier 1, capital (consisting of shareholders’ equity, lessgoodwill). At September 30, 2003, the Company and the Bank each satisfied theirrespective minimum regulatory capital requirements, and the Bank was“well-capitalized” within the meaning of federal regulatory requirements. Thecapital ratios of the Bank typically do not differ materially from those of theCompany.  However, as set forth in thetable below, the capital ratios of the Company exceed those of the Bank atSeptember 30, 2003 because of the capital impact of the trust preferredsecurities issued at the end of the quarter. The planned IBC transaction will be effected using “push down” accountingand, accordingly, the Bank’s equity and capital ratios will increase. 

 

**CAPITAL RATIOS ATSEPTEMBER 30, 2003**

 
|                      |   | **Required  Minimum  Ratio** |   | **Bank** |   | **Company** |   |
|---------------------------|--------|------------------------------|--------|----------|--------|-------------|--------|
| Tier 1 risk-based capital |   | 4.00                         | %      | 9.81     | %      | 10.93       | %      |
| Total risk-based capital  |   | 8.00                         | %      | 11.07    | %      | 12.19       | %      |
| Leverage Ratio            |   | 4.00                         | %      | 8.76     | %      | 9.75        | %      |

 

As previouslymentioned, the Company completed a $10,000 trust preferred securities offering,as part of a privately placed pool, on September 25, 2003. While the Companyfully expects this offering to qualify as Tier 1 regulatory capital, up to amaximum of 25% of such capital, and has been notified by its primary regulatorthat the substance and result of the transaction should so qualify, noregulator of the Company or the Bank has conducted an examination of the Companyor the Bank since the trust preferred securities offering was completed.Further, no regulator of the Company or the Bank has reviewed the underlyingdocuments of the offering and, accordingly, no regulator has rendered anopinion as to the completeness and technical content of such documents.

 

In addition,the FRB is developing guidance which encourages bank holding companies, such asthe Company, to limit reliance on instruments such as trust preferredsecurities to 15% of Tier 1 regulatory capital. Under such developing guidance,a bank holding company, upon exceeding this threshold, may be subject to a morerigid supervisory assessment of capital adequacy during the examinationprocess. The Company does not now exceed this threshold and, based on theCompany’s current growth strategy and capital planning, management does notanticipate exceeding this threshold in the future.

 

Further, theimpact of Financial Accounting Standards Board (“FASB”) Interpretation No. 46(“FIN 46”) as it relates to the accounting for trust preferred securities isunder review by the FRB. FIN 46 raises the issue of whether the trust issuingthe securities can be consolidated with the Company for financial reportingpurposes. It is this consolidation of the trust into the Company’s financialstatements that gives rise to the trust preferred securities being classifiedas minority interests and, therefore, eligible for Tier 1 regulatory capitaltreatment. At this time, no decision has been made by the Federal Reserve Boardwith respect to the applicability of FIN 46 to the capital treatment of trustpreferred securities, and the current guidance remains in effect.

 

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**Changesin Results of Operations**

 

**Net income. **Net income for thethree months ended September 30, 2003 was $2,600, as compared to $2,805 for thesame period in 2002. This decrease of $205, or 7.3%, resulted primarily fromlower net interest income and increased provisions for loan losses as comparedto the same period in 2002. The Company’s net interest income declined $511, or4.8%, to $10,157 for the three months ended September 30, 2003 from $10,668 forthe same period in 2002, primarily reflecting the Company’s lower net interestmargin during the third quarter of 2003 as compared to the same period in 2002.The Company’s provision for loan losses increased $301, or 22.2%, to $1,655 forthe three months ended September 30, 2003 from $1,354 for the same period in2002. This increase primarily reflects higher provisions resulting fromincreased loan growth and net chargeoffs in the Bank, as well as higherprovisions and net chargeoffs at GCB Acceptance in the quarter ended September30, 2003 compared to the same period in 2002. Offsetting these decreases, in part, was a $424, or 16.7%, increase intotal non-interest income, resulting primarily from additional gains on salesof loans generated by the Company’s mortgage division, as well as additionalfees associated with various deposit products.

 

Net income forthe nine months ended September 30, 2003 was $7,519, as compared to $8,041 forthe same period in 2002. This decrease of $522, or 6.5%, reflects substantiallythe same trends that existed during the quarter ended September 30, 2003, andalso represents a $727, or 3.4%, increase in non-interest expense to $22,303for the nine months ended September 30, 2003 from $21,576 for the same periodin 2002. This increase resulted primarily from a $1,151, or 20.2%, increase inother expense to $6,860 for the nine months ended September 30, 2003 from$5,709 for the same period in 2002 and is reflective of a combination ofseveral factors, including charges associated with credit and debit cards,losses on sales of other real estate owned and other repossessed assets, variousexpenses associated with other real estate owned, additional charitablecontributions and increased telephone and data line expense.

 

**Net Interest Income.**  The largest source of earnings for theCompany is net interest income, which is the difference between interest incomeon interest-earning assets and interest paid on deposits and otherinterest-bearing liabilities. The primary factors which affect net interestincome are changes in volume and yields of interest-earning assets andinterest-bearing liabilities, which are affected in part by management’sresponses to changes in interest rates through asset/liability management.During the three months ended September 30, 2003, net interest income was$10,157, as compared to $10,668 for the same period in 2002, representing adecrease of 4.8%. While the Company’s average balances of interest-earningassets increased more than the average balances of interest-bearing liabilitiesin the three months ended September 30, 2003, as compared to the same quarter in2002, thus potentially enhancing net interest income, such potential increasewas more than offset by the reduction in yield on these interest-earning assetswhich exceeded the decrease in cost on interest-bearing liabilities. As aresult, the Company’s net interest margin decreased in the three months endedSeptember 30, 2003 as compared to the same period in 2002. Further, while theCompany’s net interest margin for the three months ended September 30, 2003 wasessentially unchanged as compared to the three months ended June 30, 2003, theCompany feels its net interest margin will continue to compress somewhat duringthe fourth quarter of 2003 due to the Company’s belief that, based on itsasset-sensitive interest rate risk position, it will be unable to managedeposit rates down sufficiently in the near term to compensate for the declinein yields on interest-earning assets. In addition, the Company believes its netinterest margin will compress further if short-term interest rates continue todecline; however, if short-term interest rates begin to rise, based on theCompany’s asset-sensitive interest rate risk position and its current mix ofinterest-earning assets and interest-bearing liabilities, the Company believesits net interest margin will begin to increase. However, assuming (a) stableshort-term interest rates, (b) no significant change in the yield curve, (c)annualized loan growth of roughly eight to 10 percent, and (d) continued growthin low cost and total deposits, the Company believes its net interest marginwill begin to increase slightly in 2004.

 

For the ninemonths ended September 30, 2003, net interest income declined by $829, or 2.7%,to $30,015 from $30,844 for the same period in 2002, and the same trendsoutlined above with respect to the three months ended September 30, 2003 wereobserved.

 

**Provision for LoanLosses.**During the three and nine months endedSeptember 30, 2003, loan charge-offs were $1,610 and $5,460, respectively, andrecoveries of charged-off loans were $358 and $1,178, respectively.  The Company’s provision for loan lossesincreased by $301, or 22.2%, and $480, or 11.9%, to $1,655 and $4,510 for thethree and nine months ended September 30, 2003, respectively, as compared to $1,354and $4,030 for the same periods in 2002. The Company’s allowance for loanlosses increased by $228 to $12,814 at September 30, 2003 from $12,586 atDecember 31, 2002, with the ratio of the allowance for loan losses to totalloans declining slightly from 1.65% at December 31, 2002 to 1.56% at September30, 2003. As of September 30, 2003, most indicators of

 

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credit quality, as discussedbelow, have improved somewhat compared to December 31, 2002. The ratio ofallowance for loan losses to nonperforming assets was 129.03% and 94.24% atSeptember 30, 2003 and December 31, 2002, respectively, and the ratio ofnonperforming assets to total assets was 1.09% and 1.48% at September 30, 2003and December 31, 2002, respectively. The ratio of nonperforming loans to totalloans, excluding loans held for sale, was .57% and 1.02% at September 30, 2003and December 31, 2002, respectively. The improvement in credit quality indicators is related to theresolution of several commercial and consumer relationships that had been innon-accrual status.

 

While theratios referenced above have improved at September 30, 2003 compared toDecember 31, 2002, the Company’s annualized net charge-offs for the nine monthsended September 30, 2003 are essentially unchanged at $5,709 compared to actualnet charge-offs of $5,700 for the year ended December 31, 2002. Annualized netcharge-offs in Superior Financial for the nine months ended September 30, 2003were $1,096 compared to actual net charge-offs of $1,606 for the year endedDecember 31, 2002. Annualized net charge-offs in the Bank for the nine monthsended September 30, 2003 were $3,152 compared to actual net charge-offs of$2,834 for the year ended December 31, 2002. Annualized net charge-offs in GCBAcceptance for the nine months ended September 30, 2003 were $1,462 compared toactual net charge-offs of $1,260 for the year ended December 31, 2002. At thispoint, management believes that the Company’s total charge-offs for 2003 willbe comparable to 2002 charge-offs.

 

Based on theCompany’s allowance for loan losscalculation, and more specifically, the collateral values underlyingnonperforming assets, management believes the allowance for loan losses isadequate at September 30, 2003. However, management anticipates that the provision for loan losses forthe fourth quarter and full year of 2003 will be comparable to that for therespective periods of 2002.

 

**Non-InterestIncome. **Incomethat is not related to interest-earning assets, consisting primarily of servicecharges, commissions and fees, has become an important supplement to thetraditional method of earning income through interest rate spreads.

 

Totalnon-interest income for the three and nine months ended September 30, 2003 was$2,960 and $8,581, respectively, as compared to $2,536 and $7,695,respectively, for the same periods in 2002. Service charges, commissions andfees remain the largest component of total non-interest income and increasedfrom $2,079 and $5,947 for the three and nine months, respectively, endedSeptember 30, 2002 to $2,388 and $6,919, respectively, for the same periods in2003. These increases mainly reflect additional gains on sales of loansgenerated by the Company’s mortgage division, as well as additional volume andfee increases associated with the Company’s retail service charge program.

 

**Non-Interest Expense.**  Control of non-interest expense also is animportant aspect in enhancing income. Non-interest expense includes personnel,occupancy, and other expenses such as data processing, printing and supplies,legal and professional fees, postage, Federal Deposit Insurance Corporationassessment, etc. Total non-interest expense was $7,379 and $22,303 for thethree and nine months ended September 30, 2003 compared to $7,268 and $21,576for the same periods in 2002.  While the$111, or 1.5%, increase in total non-interest expense for the three monthsended September 30, 2003 compared to the same period of 2002 was minimal and isprimarily reflective of the Company’s branch expansion, the Company didexperience a $727, or 3.4%, increase in non-interest expense to $22,303 for thenine months ended September 30, 2003 from $21,576 for the same period in 2002.This increase resulted primarily from a $1,151, or 20.2%, increase in otherexpense to $6,860 for the nine months ended September 30, 2003 from $5,709 forthe same period in 2002 and is reflective of a combination of several factors,including charges associated with credit and debit cards, losses on sales ofother real estate owned and other repossessed assets, various expensesassociated with other real estate owned, additional charitable contributionsand increased telephone and data line expense.

 

Personnelcosts continue to represent the primary element of the Company’s non-interestexpenses. For the three and nine months ended September 30, 2003, salaries andbenefits represented $3,997, or 54.2%, and $12,086, or 54.2%, respectively, oftotal non-interest expense. The Company had 42 branches at September 30, 2003and December 31, 2002 and 41 at September 30, 2002, and had 387 full-timeequivalent employees at September 30, 2002 and 391 at September 30, 2003.

 

Primarily as aresult of this overall increase in non-interest expense, the Company’sefficiency ratio was negatively affected, as the ratio increased from 55.98% atSeptember 30, 2002 to 57.79% at September 30, 2003. The efficiency ratioillustrates how much it cost the Company to generate revenue; for example, itcost the Company 57.79 cents to generate one dollar of revenue for the ninemonths ended September 30, 2003.

 

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**Changes in Financial Condition**

 

Total assetsat September 30, 2003 were $914,081, an increase of $14,685, or 1.6%, fromtotal assets of $899,396 at December 31, 2002. The increase in assets wasprimarily reflective of the $58,153, or 7.9%, increase, as reflected on theCondensed Consolidated Balance Sheets, in net loans, excluding loans held forsale, and was funded primarily by the $31,720 decrease in cash and cash equivalentsand the $11,154 decrease in securities available for sale, as the Companyelected to shift some of its liquidity into higher-yielding loans during thenine months ended September 30, 2003. The Company’s deposits declined by $14,824, or 2.1%, from December 31,2002 levels, as management elected to reduce some of the Company’s highercosting liabilities, and the deposit runoff was replaced by the $10,482increase in federal funds purchased and repurchase agreements and the $6,707increase in notes payable.  In addition,the $10,000 issuance of trust preferred debt was an additional loan fundingsource.

 

At September30, 2003, loans, net of unearned income and allowance for loan losses, were$795,824 compared to $737,671 at December 31, 2002, an increase of $58,153, or7.9%, from December 31, 2002. The increase in loans during the first ninemonths of 2003 primarily reflects an increase in commercial, commercial realestate and residential real estate loans. Non-performing loans include non-accrual loans and loans 90 or more dayspast due. All loans that are 90 or more days past due are considerednon-accrual unless they are adequately secured and there is reasonableassurance of full collection of principal and interest. Non-accrual loans thatare 120 days past due without assurance of repayment are charged off againstthe allowance for loan losses. The Company has aggressive collection practicesin which senior management is heavily involved. Nonaccrual loans and loans past due 90 days and still accruing decreasedby $3,102, or 39.9%, during the nine months ended September 30, 2003 to $4,680.The decrease is mainly attributable to the resolution of several commercial andconsumer relationships discussed in Changes in Results of Operations — “Provisionfor Loans Losses”. At September 30, 2003, the ratio of the Company’sallowance for loan losses to non-performing assets (which include non-accrualloans) was 129.03%.

 

The Companymaintains an investment portfolio to provide liquidity and earnings. Investmentsat September 30, 2003 with an amortized cost of $22,321 had a market value of$22,624. At year-end 2002, investments with an amortized cost of $33,519 had amarket value of $33,777.  This decreasereflects the calling and maturing of securities, the proceeds of which wereused to fund loan growth.

 

**Effect of New Accounting Standards**

 

The FASB Statement 149, Amendment of Statement 133 on DerivativeInstruments and Hedging Activities, and Statement 150, Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equities,were effective in the third quarter 2003. Adoption of these new standards did not materially effect the Company’soperating results of financial condition.

 

FASBInterpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities,was effective in the third quarter 2003 for variable interest entities createdafter February 2003.  As disclosed inNote 4, the Company formed GC Trust for the issuance of trust preferred debtsecurities.  It is yet uncertain how FIN46 will apply to GC Trust; therefore, the Company has presented GC Trust on aconsolidated basis in these condensed consolidated statements.  Should further guidance indicate that GCTrust may no longer be consolidated, the Company’s investments and trustpreferred debt will increase by $310,000. It is currently unknown when, or if, the FASB will address this issue ofapplication of FIN 46 to trust preferred debt securities.

 

Also, if GCTrust may no longer be consolidated, the trust preferred debt securities may nolonger qualify as Tier 1 regulatory capital. However, in July 2003, the FRB issued a supervisory letter instructingbank holding companies to continue to include trust preferred securities inTier 1 regulatory capital until notice is given to the contrary.

 

 

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

 

A comprehensive qualitative and quantitative analysis regarding marketrisk was disclosed in the Company’s December 31, 2002 Form 10-K.  No material changes in the assumptions usedor results obtained from the model have occurred since December 31, 2002.

 

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Actual results for the year ending December 31, 2003 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**

 

(a) *DisclosureControls and Procedures.*A review and evaluation was performed bythe Company’s principal executive and financial officers regarding theeffectiveness of the Company’s disclosure controls and procedures as ofSeptember 30, 2003, pursuant to Rule 13a-15(b) of the Securities Act of1934.  Based on that review andevaluation, the principal executive and financial officers have concluded thatthe Company’s current disclosure controls and procedures, as designed andimplemented, are effective.

 

(b) *Changes inInternal Control over Financial Reporting.*During the quarter endedSeptember 30, 2003, there has not been any change in the Company’s internalcontrol over financial reporting identified in connection with the evaluationrequired by Rule 13a-15(d) of the Securities Act of 1934 that has materiallyaffected, or is reasonable likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**PART II - OTHERINFORMATION**

 

 

**Item 1.****                                   LegalProceedings**

 

The Companyand its subsidiaries are involved in various claims and legal actions arisingin the ordinary course of business. Management currently is not aware of anymaterial legal proceedings to which the Company or any of its subsidiaries is aparty or to which any of their property is subject.

 

 

**Item 2.****                                   Changesin Securities and Use of Proceeds**

 

None.

 

 

**Item 3.****                                   Defaultsupon Senior Securities**

 

None.

 

 

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

 

None.

 

**Item 5.****                                   OtherInformation**

 

None.

 

 

**Item 6.****                                   Exhibitsand Reports on Form 8-K**

 

(a)Exhibits

 
| Exhibit No.  31.1 |   | Rule 13a-14(a)/15d-14(a)  Certification of Chief Executive Officer |
|-------------------|--------|--------------------------------------------------------------------|
|              |   |                                                               |
| Exhibit No.  31.2 |   | Rule  13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|              |   |                                                               |
| Exhibit No.  32.1 |   | Section 1350  Certification of Chief Executive Officer             |
|              |   |                                                               |
| Exhibit No.  32.2 |   | Section 1350  Certification of Chief Financial Officer             |

 

(b)Reports onForm 8-K

 

The Company filed a Form 8-K on July 16, 2003 announcing financial results for the three and six month periods endedSeptember 30, 2003.

 

The Company filed a Form 8-K on September 17, 2003, announcing that ithas extended for an additional 12-month period the authorization for therepurchase of up to $2,000,000 of the Company’s outstanding common stock.

 

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**SIGNATURES**

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

                                                
|       | Greene County Bancshares, Inc. |   |
|------------|--------------------------------|--------|
| Registrant |

 

 
| Date:  | November 12,  2003                                 |   | By: | /s/  R. Stan Puckett     |   |
|--------|----------------------------------------------------|--------|-----|-------------------------------|--------|
|   | R. Stan  Puckett                                   |
|   | Chairman of  the Board and Chief Executive Officer |
|   | (Duly  authorized representative)                  |
|   |                                               |
|   |                                               |
| Date:  | November 12,  2003                                 |   | By: | /s/  William F. Richmond |   |
|   | William F.  Richmond                               |
|   | Senior Vice  President and Chief Financial Officer |
|   | (Principal  financial and accounting officer)      |

 

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