**UNITED STATESSECURITIES 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 June 30, 2006**                                              |
| ** **         | ** **                                                                                     |
|               | **OR**                                                                                         |
|               |                                                                                           |
| o                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

** **

**For thetransition period from                                 to                                 **

**Commissionfile number   0-14289**

**GREENE COUNTY BANCSHARES, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  YES   x   NO   o

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

Largeaccelerated filer  o           Acceleratedfiler  x           Non-acceleratedfiler o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.) YES   o   NO   x

Asof August 8, 2006, the number of shares outstanding of the issuer’s commonstock was: 9,788,145.

 

 

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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 — June 30, 2006  and December 31, 2005.                                                       |   |   |
|--------|------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |                                                                                                                                     |   |   |
|   | Condensed Consolidated Statements of Income and  Comprehensive Income — For the three and six months  ended June 30, 2006 and 2005. |   |   |
|   |                                                                                                                                     |   |   |
|   | Condensed Consolidated Statement of Shareholders’  Equity — For the six months ended June 30, 2006.                            |   |   |
|   |                                                                                                                                     |   |   |
|   | Condensed Consolidated Statements of Cash Flows — For  the six months ended June 30, 2006 and 2005.                                 |   |   |
|   |                                                                                                                                     |   |   |
|   | Notes to Condensed Consolidated Financial Statements.                                                                                    |   |   |

 

1

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

 
| ** **                                                                                      | ** ** | **(Unaudited)  June 30,  2006** | ** ** | **December 31,  2005*** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------|------------|
| **Assets**                                                                                      |       |                                 |       |                         |       |
|                                                                                            |       |                                 |       |                         |       |
| Cash and due from banks                                                                         |       | $                                    | 44,358     |                         | $          | 46,136 |   |
|                                                                                            |       |                                 |       |                         |       |
| Federal funds sold and other                                                                    |       | 19,616                               |       | 28,387                       |       |
|                                                                                            |       |                                 |       |                         |       |
| Securities available for sale                                                                   |       | 44,457                               |       | 48,868                       |       |
|                                                                                            |       |                                 |       |                         |       |
| Securities held to maturity (with a market value of  $2,696 and $3,335)                         |       | 2,740                                |       | 3,379                        |       |
|                                                                                            |       |                                 |       |                         |       |
| FHLB, Bankers Bank and other stock, at cost                                                     |       | 6,879                                |       | 6,489                        |       |
|                                                                                            |       |                                 |       |                         |       |
| Loans held for sale                                                                             |       | 2,054                                |       | 2,686                        |       |
|                                                                                            |       |                                 |       |                         |       |
| Loans, net of unearned interest                                                                 |       | 1,437,935                            |       | 1,378,642                    |       |
|                                                                                            |       |                                 |       |                         |       |
| Allowance for loan losses                                                                       |       | (20,834                              | )          | (19,739                      | )          |
|                                                                                            |       |                                 |       |                         |       |
| Premises and equipment, net                                                                     |       | 52,735                               |       | 49,985                       |       |
|                                                                                            |       |                                 |       |                         |       |
| Goodwill and other intangible assets                                                            |       | 39,081                               |       | 39,622                       |       |
|                                                                                            |       |                                 |       |                         |       |
| Other assets                                                                                    |       | 36,609                               |       | 35,534                       |       |
|                                                                                            |       |                                 |       |                         |       |
| Total assets                                                                                    |       | $                                    | 1,665,630  |                         | $          | 1,619,989 |   |
|                                                                                            |       |                                 |       |                         |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                  |       |                                 |       |                         |       |
|                                                                                            |       |                                 |       |                         |       |
| Liabilities                                                                                     |       |                                 |       |                         |       |
|                                                                                            |       |                                 |       |                         |       |
| Deposits                                                                                        |       | $                                    | 1,283,606  |                         | $          | 1,295,879 |   |
|                                                                                            |       |                                 |       |                         |       |
| Federal funds purchased                                                                         |       | 26,000                               |       | —                       |       |
|                                                                                            |       |                                 |       |                         |       |
| Repurchase agreements                                                                           |       | 25,133                               |       | 17,498                       |       |
|                                                                                            |       |                                 |       |                         |       |
| FHLB advances and notes payable                                                                 |       | 123,281                              |       | 105,146                      |       |
|                                                                                            |       |                                 |       |                         |       |
| Subordinated debentures                                                                         |       | 13,403                               |       | 13,403                       |       |
|                                                                                            |       |                                 |       |                         |       |
| Accrued interest payable and other liabilities                                                  |       | 17,318                               |       | 20,042                       |       |
|                                                                                            |       |                                 |       |                         |       |
| Total liabilities                                                                               |       | 1,488,741                            |       | 1,451,968                    |       |
|                                                                                            |       |                                 |       |                         |       |
| Shareholders’ equity                                                                       |       |                                 |       |                         |       |
| Common stock: $2 par, 15,000,000 shares authorized,  9,788,145 and 9,766,336 shares outstanding |       | 19,577                               |       | 19,533                       |       |
|                                                                                            |       |                                 |       |                         |       |
| Additional paid-in capital                                                                      |       | 71,285                               |       | 70,700                       |       |
|                                                                                            |       |                                 |       |                         |       |
| Retained earnings                                                                               |       | 86,389                               |       | 78,158                       |       |
|                                                                                            |       |                                 |       |                         |       |
| Accumulated other comprehensive loss                                                            |       | (362                                 | )          | (370                         | )          |
|                                                                                            |       |                                 |       |                         |       |
| Total shareholders’ equity                                                                 |       | 176,889                              |       | 168,021                      |       |
|                                                                                            |       |                                 |       |                         |       |
| Total liabilities and shareholders’ equity                                                 |       | $                                    | 1,665,630  |                         | $          | 1,619,989 |   |

----

* Condensed fromaudited consolidated financial statements.

See accompanying notes.

2

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** **

**GREENECOUNTY BANCSHARES, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMEThree and Six Months Ended June 30, 2006 and 2005(Amounts in thousands, except share and per share data)**
| ** **                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**                                 | ** ** | **(Unaudited)**                               | ** ** |
| ** **                                            | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                       |       |                                            |       |                                          |       |   |   |   |   |
| Interest and fees on loans                            |       | $                                               | 27,781     |                                          | $          | 19,851 |   | $ | 53,881 |   | $ | 37,930 |   |
| Investment securities                                 |       | 649                                             |       | 592                                           |       | 1,280 |   | 1,065 |   |
| Federal funds sold and other                          |       | 59                                              |       | 260                                           |       | 95 |   | 443 |   |
|                                                  |       | 28,489                                          |       | 20,703                                        |       | 55,256 |   | 39,438 |   |
|                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Interest expense                                      |       |                                            |       |                                          |       |   |   |   |   |
| Deposits                                              |       | 8,647                                           |       | 5,501                                         |       | 16,689 |   | 9,763 |   |
| Borrowings                                            |       | 2,069                                           |       | 1,130                                         |       | 3,608 |   | 2,276 |   |
|                                                  |       | 10,716                                          |       | 6,631                                         |       | 20,297 |   | 12,039 |   |
|                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Net interest  income                                  |       | 17,773                                          |       | 14,072                                        |       | 34,959 |   | 27,399 |   |
|                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Provision for  loan losses                            |       | 1,244                                           |       | 1,060                                         |       | 2,308 |   | 2,682 |   |
|                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Net interest  income after provision  for loan losses |       | 16,529                                          |       | 13,012                                        |       | 32,651 |   | 24,717 |   |
|                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Noninterest income                                    |       |                                            |       |                                          |       |   |   |   |   |
| Service charges and fees                              |       | 4,001                                           |       | 2,836                                         |       | 7,232 |   | 4,978 |   |
| Other                                                 |       | 1,027                                           |       | 627                                           |       | 2,551 |   | 1,661 |   |
|                                                  |       | 5,028                                           |       | 3,463                                         |       | 9,783 |   | 6,639 |   |
|                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Noninterest expense                                   |       |                                            |       |                                          |       |   |   |   |   |
| Salaries and employee benefits                        |       | 6,266                                           |       | 5,099                                         |       | 12,657 |   | 10,344 |   |
| Occupancy and furniture and equipment expense         |       | 2,050                                           |       | 1,774                                         |       | 4,109 |   | 3,513 |   |
| Other                                                 |       | 4,363                                           |       | 3,549                                         |       | 8,619 |   | 6,840 |   |
|                                                  |       | 12,679                                          |       | 10,422                                        |       | 25,385 |   | 20,697 |   |
|                                                  |       |                                            |       |                                          |       |   |   |   |   |
|                                                       |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 
| Income before  income taxes           |   | 8,878     |   | 6,053     |   | 17,049    |   | 10,659    |   |
|---------------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|-----------|--------|
|                                  |   |      |   |      |   |      |   |      |   |
| Provision for  income taxes           |   | 3,395     |   | 2,339     |   | 6,470     |   | 4,010     |   |
|                                  |   |      |   |      |   |      |   |      |   |
| Net income                            |   | $         | 5,483  |      | $      | 3,714     |   | $         | 10,579 |   | $ | 6,649 |   |
|                                  |   |      |   |      |   |      |   |      |   |
| Comprehensive  income                 |   | $         | 5,498  |      | $      | 3,732     |   | $         | 10,587 |   | $ | 6,554 |   |
|                                  |   |      |   |      |   |      |   |      |   |
| Per share of common  stock:           |   |      |   |      |   |      |   |      |   |
| Basic earnings                        |   | $         | 0.56   |      | $      | 0.49      |   | $         | 1.08   |   | $ | 0.87 |   |
| Diluted earnings                      |   | $         | 0.55   |      | $      | 0.48      |   | $         | 1.07   |   | $ | 0.86 |   |
| Dividends                             |   | $         | 0.12   |      | $      | 0.12      |   | $         | 0.24   |   | $ | 0.24 |   |
|                                  |   |      |   |      |   |      |   |      |   |
| Weighted average shares  outstanding: |   |      |   |      |   |      |   |      |   |
| Basic                                 |   | 9,785,936 |   | 7,650,884 |   | 9,778,288 |   | 7,649,982 |   |
| Diluted                               |   | 9,897,987 |   | 7,745,985 |   | 9,891,817 |   | 7,745,130 |   |
|                                  |   |      |   |      |   |      |   |      |   |

 

See accompanying notes.

3

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**GREENE COUNTY BANCSHARES, INC.****CONDENSED CONSOLIDATED STATEMENT OF CHANGES INSHAREHOLDERS’ EQUITY****For the Six Months Ended June 30, 2006****(Amounts in thousands, except share and per sharedata)**

 
| ** **                                          | ** ** | ** **      | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated** | ** ** | ** **        | ** ** |
|-----------------------------------------------------|------------|-----------------|------------|----------------|------------|--------------|------------|-----------------|------------|-------------------|------------|
| ** **                                          | ** ** | ** **      | ** ** | ** **     | ** ** | ** **   | ** ** | **Other**       | ** ** | **Total**         | ** ** |
| ** **                                          | ** ** | ** **      | ** ** | **Additional** | ** ** | ** **   | ** ** | **Compre-**     | ** ** | **Share-**        | ** ** |
| ** **                                          | ** ** | **Common**      | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **hensive**     | ** ** | **holders’** | ** ** |
| ** **                                          | ** ** | **Stock**       | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Loss**        | ** ** | **Equity**        | ** ** |
| ** **                                          | ** ** | **(Unaudited)** | ** ** |
| **Balance,  January 1, 2006**                       |       | $               | 19,533     |           | $          | 70,700       |       | $               | 78,158     |              | $          | (370 | ) | $ | 168,021 |   |
|                                                |       |            |       |           |       |         |       |            |       |              |       |
| Issuance of  21,809 shares under stock  option plan |       | 44              |       | 400            |       | —       |       | —          |       | 444               |       |
| Stock-based  compensation                           |       | —          |       | 185            |       | —       |       | —          |       | 185               |       |
| Dividends paid  ($.24 per share)                    |       | —          |       | —         |       | (2,348       | )          | —          |       | (2,348            | )          |
| Comprehensive income:                               |       |            |       |           |       |         |       |            |       |              |       |
| Net income                                          |       | —          |       | —         |       | 10,579       |       | —          |       | 10,579            |       |
| Change in unrealized gains  (losses), net of taxes  |       | —          |       | —         |       | —       |       | 8               |       | 8                 |       |
| Total comprehensive income                          |       |            |       |           |       |         |       |            |       | 10,587            |       |
|                                                |       |            |       |           |       |         |       |            |       |              |       |
| **Balance, June 30, 2006**                          |       | $               | 19,577     |           | $          | 71,285       |       | $               | 86,389     |              | $          | (362 | ) | $ | 176,889 |   |

 

See accompanying notes.

4

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**GREENE COUNTY BANCSHARES, INC.****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****For the Six Months Ended June 30, 2006 and 2005****(Amounts in thousands)**

 
| ** **                                                                           | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                           | ** ** | **2006**          | ** ** | **2005**          | ** ** |
| ** **                                                                           | ** ** | **(Unaudited)**   | ** ** |
| ** **                                                                           |       |              |       |              |       |
| **Cash  flows from operating activities**                                            |       |              |       |              |       |
| Net income                                                                           |       | $                 | 10,579     |              | $          | 6,649 |   |
| Adjustments to reconcile net income to net cash  provided  from operating activities |       |              |       |              |       |
| Provision for loan losses                                                            |       | 2,308             |       | 2,682             |       |
| Depreciation and amortization                                                        |       | 2,077             |       | 1,763             |       |
| Security amortization and accretion, net                                             |       | (9                | )          | 9                 |       |
| Loss on sale of securities                                                           |       | 8                 |       | —            |       |
| FHLB stock dividends                                                                 |       | (165              | )          | (128              | )          |
| Net gain on sale of mortgage loans                                                   |       | (391              | )          | (207              | )          |
| Originations of mortgage loans held for sale                                         |       | (29,924           | )          | (16,755           | )          |
| Proceeds from sales of mortgage loans                                                |       | 30,947            |       | 17,056            |       |
| Increase in cash surrender value of life insurance                                   |       | (391              | )          | (289              | )          |
| Net (gain) loss from sales of fixed assets                                           |       | (2                | )          | 19                |       |
| Stock compensation expense                                                           |       | 185               |       | —            |       |
| Net (gain) loss on other real estate and repossessed  assets                         |       | (148              | )          | 26                |       |
| Deferred tax benefit                                                                 |       | (874              | )          | (797              | )          |
| Net changes:                                                                         |       |              |       |              |       |
| Other assets                                                                         |       | (492              | )          | (1,076            | )          |
| Accrued interest payable and other liabilities                                       |       | (2,724            | )          | (5,327            | )          |
| Net cash provided from operating activities                                          |       | 10,984            |       | 3,625             |       |
|                                                                                 |       |              |       |              |       |
|                                                                                 |       |              |       |              |       |
| **Cash  flows from investing activities**                                            |       |              |       |              |       |
| Purchase of securities available for sale                                            |       | (5,948            | )          | (16,860           | )          |
| Proceeds from sale of securities available for sale                                  |       | 985               |       | —            |       |
| Proceeds from maturities of securities held for sale                                 |       | 9,386             |       | 800               |       |
| Proceeds from maturities of securities held to  maturity                             |       | 640               |       | 902               |       |
| Purchase of life insurance                                                           |       | (41               | )          | (1,450            | )          |
| Net change in loans                                                                  |       | (62,387           | )          | (115,364          | )          |
| Proceeds from sale of other real estate                                              |       | 2,571             |       | 1,259             |       |
| Proceeds from sale of fixed assets                                                   |       | 23                |       | 8                 |       |
| Improvements to other real estate                                                    |       | (47               | )          | —            |       |
| Premises and equipment expenditures                                                  |       | (4,308            | )          | (1,196            | )          |
| Net cash used in investing activities                                                |       | (59,126           | )          | (131,901          | )          |
|                                                                                 |       |              |       |              |       |
|                                                                                 |       |              |       |              |       |
| **Cash  flows from financing activities**                                            |       |              | ** ** |              |       |
| Net change in deposits                                                               |       | (12,273           | )          | 150,413           |       |
| Net change in federal funds purchased and repurchase  agreements agreements          |       | 33,635            |       | 2,558             |       |
| Proceeds from notes payable                                                          |       | 195,900           |       | 161,255           |       |
| Proceeds from subordinated debentures                                                |       | —            |       | 3,093             |       |
| Repayments of notes payable                                                          |       | (177,765          | )          | (175,969          | )          |
| Dividends paid                                                                       |       | (2,348            | )          | (1,837            | )          |
| Proceeds from issuance of common stock                                               |       | 444               |       | 51                |       |
|                                                                                 |       |              |       |              |       |
| Net cash provided from financing activities                                          |       | 37,593            |       | 139,564           |       |
| ** **                                                                           |       |              |       |              |       |
| **Net  change in cash and cash equivalents**                                         |       | (10,549           | )          | 11,288            |       |
| Cash and cash  equivalents, beginning of year                                        |       | 74,523            |       | 70,648            |       |
| **Cash  and cash equivalents, end of period**                                        |       | $                 | 63,974     |              | $          | 81,936 |   |

 
|                                                                 |   |   |   |   |   |
|----------------------------------------------------------------------|--------|--------|--------|--------|--------|
| **Supplemental  disclosures — cash and noncash**                |   |   |   |   |   |
| Interest paid                                                        |   | $      | 20,136 |   | $      | 11,842 |   |
| Income taxes paid                                                    |   | 7,162  |   | 3,275  |   |
| Loans converted to other real estate                                 |   | 3,121  |   | 2,570  |   |
| Unrealized gain  (loss) on available for sale securities, net of tax |   | 8      |   | (95    | )      |
|                                                                      |        |        |        |        |        |  |  |

 

See accompanying notes.

5

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**GREENECOUNTY BANCSHARES, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**June 30,2006**

**Unaudited**

**(Amountsin thousands, except share and per share data)**

**NOTE 1 — PRINCIPLES OFCONSOLIDATION**

The accompanyingunaudited condensed consolidated financial statements of Greene CountyBancshares, Inc. (the “Company”) and its wholly owned subsidiary, Greene CountyBank (the “Bank”), have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim information andin accordance with the instructions to Form 10-Q and Article 10 of RegulationS-X as promulgated by the Securities and Exchange Commission (“SEC”).Accordingly, they do not include all the information and notes required byaccounting principles generally accepted in the United States of America forcomplete financial statements. In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Operating results for the three and six monthsended June 30, 2006 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2006. For further information, referto the consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005.Certain amounts from prior period financial statements have been reclassifiedto conform to the current year’s presentation. These reclassifications had 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 by theFinancial 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 of thecost 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 of previouslygranted 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 with exerciseprices equal to the fair market value of the Company’s common stock on the dateof 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 June 30, 2006, 342,798 shares remained available for future grant.  The compensation cost that has been chargedagainst income for this plan was approximately $93,000 and $185,000 for thethree and six months ended June 30, 2006, respectively.

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 June 30, 2006 and 2005. The Company granted90,261 and 71,228 of stock options for the quarters ended March 31, 2006 and2005, respectively, with a fair value of $8.90 and $7.12, respectively, foreach option.

6

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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 years 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 date of grant. No post-vestingrestrictions exist for these options. The following table illustrates theassumptions for the Black-Scholes model used in determining the fair value ofoptions granted to employees in the quarters ended March 31, 2006 and 2005,respectively.  No options were grantedduring the quarters ended June 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 June 30, 2006 and changes during thesix month period ended June 30, 2006 is presented below:
| ** **                            | ** ** | ** **  | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|---------------------------------------|------------|-------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                            | ** ** | ** **  | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                            | ** ** | ** **  | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                            | ** ** | ** **  | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                            | ** ** | **Options** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at  beginning of year     |       | 396,910     |       | $            | 21.65      |            |       |          |       |   |
| Granted                               |       | 90,261      |       | 28.90        |       |            |       |          |       |
| Exercised                             |       | (21,809     | )          | 20.38        |       |            |       |          |       |
| Forfeited                             |       | (8,237      | )          | 28.26        |       |            |       |          |       |
|                                  |       |        |       |         |       |            |       |          |       |
| Outstanding at  June 30, 2006         |       | 457,125     |       | $            | 23.02      |            | 6.3 years  |          | $          | 3,661 |   |
|                                  | ** ** | ** **  |       |         |       |            |       |          |       |
| Options exercisable at  June 30, 2006 |       | 271,734     |       | $            | 20.89      |            | 5.0 years  |          | $          | 2,768 |   |

 

The total aggregateintrinsic value of options (which is the amount by which the stock priceexceeded the exercise price of the options) exercised during the six monthsended June 30, 2006 and 2005, was $196 and $40 respectively. The total fairvalue of shares vesting during the six months ended June 30, 2006 and 2005, was$185 and $214, respectively. As of June 30, 2006, there was $1,210 of totalunrecognized compensation cost related to non-vested share-based compensationarrangements, which is expected to be recognized over a weighted-average periodof 2.9 years.

During the six monthsended June 30, 2006, the amount of cash received from the exercise of stockoptions was $444.

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 25. The effect (increase/(decrease)of the adoption of SFAS No. 123R is as follows:
| ** **                        | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                              |       |                                                  |       |                                                |       |
| Income before  income tax expense |       | $                                                     | (93        | )                                                   | $          | (185 | ) |
| Net income                        |       | $                                                     | (93        | )                                                   | $          | (185 | ) |
|                              |       |                                                  |       |                                                |       |
| Basic earnings per common share   |       | $                                                     | (0.01      | )                                                   | $          | (0.02 | ) |
| Diluted earnings per share        |       | $                                                     | (0.01      | )                                                   | $          | (0.02 | ) |

 

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 prior year’sthree months and six months ended June 30, 2005:
| ** **                                                                                                          | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                                                                                |       |                                                  |       |                                                |       |
| Net income:                                                                                                         |       |                                                  |       |                                                |       |
| As reported                                                                                                         |       | $                                                     | 3,714      |                                                | $          | 6,649 |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax effects         |       | 4                                                     |       | 7                                                   |       |
| Deduct: Total stock-based compensation expense  determined under fair value-based method for all awards, net of tax |       | (40                                                   | )          | (90                                                 | )          |
|                                                                                                                |       |                                                  |       |                                                |       |
| Pro forma                                                                                                           |       | $                                                     | 3,678      |                                                | $          | 6,526 |   |
|                                                                                                                |       |                                                  |       |                                                |       |
| Earnings per  common share:                                                                                         |       |                                                  |       |                                                |       |
| As reported                                                                                                         |       | $                                                     | 0.49       |                                                | $          | 0.87 |   |
| Pro forma                                                                                                           |       | $                                                     | 0.48       |                                                | $          | 0.85 |   |
|                                                                                                                |       |                                                  |       |                                                |       |
| Diluted earnings  per common share:                                                                                 |       |                                                  |       |                                                |       |
| As reported                                                                                                         |       | $                                                     | 0.48       |                                                | $          | 0.86 |   |
| Pro forma                                                                                                           |       | $                                                     | 0.47       |                                                | $          | 0.84 |   |

 

8

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# **NOTE 3 —LOANS (Net)**

Loans at June 30,2006 and December 31, 2005 were as follows:
| ** **                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                             |       |              |       |                  |       |
| Commercial                       |       | $                 | 266,416    |                  | $          | 245,285 |   |
| Commercial real  estate          |       | 794,090           |       | 729,254               |       |
| Residential real  estate         |       | 300,298           |       | 319,797               |       |
| Consumer                         |       | 85,526            |       | 90,682                |       |
| Other                            |       | 2,458             |       | 3,476                 |       |
| Unearned  interest               |       | (10,853           | )          | (9,852                | )          |
| Loans, net of  unearned interest |       | $                 | 1,437,935  |                  | $          | 1,378,642 |   |
|                             |       |              |       |                  |       |
| Allowance for loan  losses       |       | $                 | (20,834    | )                     | $          | (19,739 | ) |

 

Transactionsin the allowance for loan losses and certain information about nonaccrual loansand loans 90 days past due but still accruing interest for the six months endedJune 30, 2006 and twelve months ended December 31, 2005 were as follows:                
| ** **                      | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                            |       |                    |       |                        |       |
| Balance at  beginning of year   |       | $                       | 19,739     |                        | $          | 15,721 |   |
| Add (deduct):                   |       |                    |       |                        |       |
| Reserve acquired in acquisition |       | —                  |       | 1,467                       |       |
| Provision                       |       | 2,308                   |       | 6,365                       |       |
| Loans charged off               |       | (1,813                  | )          | (5,583                      | )          |
| Recoveries of loans charged off |       | 600                     |       | 1,769                       |       |
| Ending balance                  |       | $                       | 20,834     |                        | $          | 19,739 |   |

 
| ** **                               | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                     |       |                    |       |                        |       |
| Loans past due  90 days still on accrual |       | $                       | 65         |                        | $          | 809 |   |
| Nonaccrual loans                         |       | 4,816                   |       | 5,915                       |       |
| Total                                    |       | $                       | 4,881      | ** **                  | $          | 6,724 |   |

 

9

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

Basic earnings per share(EPS) of common stock is computed by dividing net income by the weightedaverage number of common shares outstanding during the period. Diluted earningsper share 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 andsix months ended June 30, 2006, 30,485 options are excluded from the effect ofdilutive securities because they are anti-dilutive; 60,185 options aresimilarly excluded from the effect of dilutive securities for the three and sixmonths ended June 30, 2005.

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 30,2006 and 2005:
| ** **                                                        | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **Income**                                          | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                                     | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                                |       |   |   |   |   |   |   |
| **Basic  EPS**                                                    |       |                                                |       |   |   |   |   |   |   |
| Income available to common shareholders                           |       | $                                                   | 5,483      |   | 9,785,936 |   | $ | 3,714 |   | 7,650,884 |   |
|                                                              |       |                                                |       |   |   |   |   |   |   |
| **Effect  of dilutive securities**                                |       |                                                |       |   |   |   |   |   |   |
| Stock options outstanding                                         |       | —                                              |       | 112,051 |   | — |   | 95,101 |   |
|                                                              |       |                                                |       |   |   |   |   |   |   |
| **Diluted  EPS**                                                  |       |                                                |       |   |   |   |   |   |   |
| Income available  to common shareholders plus assumed conversions |       | $                                                   | 5,483      |   | 9,897,987 |   | $ | 3,714 |   | 7,745,985 |   |

 

 

 
| ** **                                                        | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **Income**                                        | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                                   | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                              |       |   |   |   |   |   |   |
| **Basic  EPS**                                                    |       |                                              |       |   |   |   |   |   |   |
| Income available to common shareholders                           |       | $                                                 | 10,579     |   | 9,778,288 |   | $ | 6,649 |   | 7,649,982 |   |
|                                                              |       |                                              |       |   |   |   |   |   |   |
| **Effect of  dilutive securities**                                |       |                                              |       |   |   |   |   |   |   |
| Stock options outstanding                                         |       | —                                            |       | 113,529 |   | — |   | 95,148 |   |
|                                                              |       |                                              |       |   |   |   |   |   |   |
| **Diluted  EPS**                                                  |       |                                              |       |   |   |   |   |   |   |
| Income available  to common shareholders plus assumed conversions |       | $                                                 | 10,579     |   | 9,891,817 |   | $ | 6,649 |   | 7,745,130 |   |

 

10

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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.**

Segment performanceis evaluated 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 June 30, 2006** | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                                          |       |       |       |     |       |                |       |                 |       |             |       |
| Net interest  income (expense)                                |       | $          | 16,626     |     | $          | 1,423               |       | $                    | (276       | )                | $          | —     |       | $ | 17,773 |   |
| Provision for  loan losses                                    |       | 999        |       | 245      |       | —              |       | —               |       | 1,244            |       |
| Noninterest  income                                           |       | 4,583      |       | 629      |       | 45                  |       | (229                 | )          | 5,028            |       |
| Noninterest  expense                                          |       | 11,514     |       | 1,199    |       | 195                 |       | (229                 | )          | 12,679           |       |
| Income tax  expense (benefit)                                 |       | 3,342      |       | 238      |       | (185                | )          | —               |       | 3,395            |       |
| **Segment profit**                                            |       | $          | 5,354      |     | $          | 370                 |       | $                    | (241       | )                | $          | —     |       | $ | 5,483 |   |
|                                                          |       |       |       |     |       |                |       |                 |       |             |       |
| **Segment  assets at June 30, 2006**                          |       | $          | 1,629,798  |     | $          | 31,544              |       | $                    | 4,288      |             | $          | —     |       | $ | 1,665,630 |   |

 
| **Three months ended June 30, 2005** | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                                          |       |       |       |     |       |                |       |                 |       |             |       |
| Net interest  income (expense)                                |       | $          | 12,698     |     | $          | 1,547               |       | $                    | (173       | )                | $          | —     |       | $ | 14,072 |   |
| Provision for  loan losses                                    |       | 738        |       | 322      |       | —              |       | —               |       | 1,060            |       |
| Noninterest  income                                           |       | 3,163      |       | 516      |       | 6                   |       | (222                 | )          | 3,463            |       |
| Noninterest  expense                                          |       | 9,389      |       | 1,086    |       | 169                 |       | (222                 | )          | 10,422           |       |
| Income tax  expense (benefit)                                 |       | 2,212      |       | 257      |       | (130                | )          | —               |       | 2,339            |       |
| **Segment profit**                                            |       | $          | 3,522      |     | $          | 398                 |       | $                    | (206       | )                | $          | —     |       | $ | 3,714 |   |
|                                                          |       |       |       |     |       |                |       |                 |       |             |       |
| **Segment assets at June 30, 2005**                           |       | $          | 1,340,531  |     | $          | 31,272              |       | $                    | 2,391      |             | $          | —     |       | $ | 1,374,194 |   |

 
| **Six months ended June 30, 2006** | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                                        |       |       |       |     |       |                |       |                 |       |             |       |
| Net interest  income (expense)                              |       | $          | 32,642     |     | $          | 2,852               |       | $                    | (535       | )                | $          | —     |       | $ | 34,959 |   |
| Provision for  loan losses                                  |       | 1,841      |       | 467      |       | —              |       | —               |       | 2,308            |       |
| Noninterest  income                                         |       | 8,913      |       | 1,078    |       | 242                 |       | (450                 | )          | 9,783            |       |
| Noninterest  expense                                        |       | 23,213     |       | 2,310    |       | 312                 |       | (450                 | )          | 25,385           |       |
| Income tax  expense (benefit)                               |       | 6,334      |       | 452      |       | (316                | )          | —               |       | 6,470            |       |
| **Segment profit**                                          |       | $          | 10,167     |     | $          | 701                 |       | $                    | (289       | )                | $          | —     |       | $ | 10,579 |   |
|                                                        |       |       |       |     |       |                |       |                 |       |             |       |

 
| **Six months ended June 30, 2005** | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                                        |       |       |       |     |       |                |       |                 |       |             |       |
| Net interest  income (expense)                              |       | $          | 24,687     |     | $          | 3,024               |       | $                    | (312       | )                | $          | —     |       | $ | 27,399 |   |
| Provision for  loan losses                                  |       | 2,027      |       | 655      |       | —              |       | —               |       | 2,682            |       |
| Noninterest  income                                         |       | 5,943      |       | 918      |       | 189                 |       | (411                 | )          | 6,639            |       |
| Noninterest  expense                                        |       | 18,627     |       | 2,184    |       | 297                 |       | (411                 | )          | 20,697           |       |
| Income tax  expense (benefit)                               |       | 3,789      |       | 433      |       | (212                | )          | —               |       | 4,010            |       |
| **Segment  profit**                                         |       | $          | 6,187      |     | $          | 670                 |       | $                    | (208       | )                | $          | —     |       | $ | 6,649 |   |

 

11

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**Asset Quality Ratios**
| **As of and for the period ended June 30, 2006** | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|------------|
|                                                                                          |       |       |       |     |       |      |       |      |
| Nonperforming  loans as a percentage of total loans net of unearned income                    |       | 0.31       | %          | 1.32     | %          | 0.34      | %          |      |
| Nonperforming  assets as a percentage of total assets                                         |       | 0.43       | %          | 1.95     | %          | 0.47      | %          |      |
| Allowance for  loan losses as a percentage of total loans net of unearned income              |       | 1.28       | %          | 7.90     | %          | 1.45      | %          |      |
| Allowance for  loan losses as a percentage of nonperforming loans                             |       | 410.68     | %          | 569.70   | %          | 426.84    |       |      |
| YTD Annualized net  charge-offs to average total loans, net of unearned income                |       | 0.12       | %          | 2.52     | %          | 0.17      | %          |      |

 
| **As of and for the period ended June 30, 2005** | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|------------|
|                                                                                          |       |       |       |     |       |      |       |      |
| Nonperforming  loans as a percentage of total loans net of unearned income                    |       | 0.59       | %          | 1.29     | %          | 0.62      | %          |      |
| Nonperforming  assets as a percentage of total assets                                         |       | 0.64       | %          | 1.97     | %          | 0.69      | %          |      |
| Allowance for  loan losses as a percentage of total loans net unearned income                 |       | 1.25       | %          | 7.71     | %          | 1.46      | %          |      |
| Allowance for  loan losses as a percentage of nonperforming loans                             |       | 213.91     | %          | 595.64   | %          | 235.95    | %          |      |
| YTD Annualized  net charge-offs to average total loans, net of unearned income                |       | 0.16       | %          | 4.19     | %          | 0.27      | %          |      |
|                                                                                          |       |       |       |     |       |      |       |      |

 
| **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 CREDITAGREEMENT**

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.  SunTrust’s obligation to make advances to theCompany under the credit agreement terminates on August 29, 2006, unless theloan is extended or earlier terminated. 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**

**ThisQuarterly Report on Form 10-Q contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. Forward-looking statements, which are based on assumptions and estimatesand describe our future plans, strategies and expectations, are generallyidentifiable by the use of the words “anticipate,” “will,” “believe,” “may,” “could,”“would,” “should,” “estimate,” “expect,” “intend,” “seek,” or similarexpressions.  These forward-lookingstatements may address, among other things, the Company’s business plans,objectives or goal for future operations or expansion, the Company’s forecastedrevenues, earnings, assets or other measures of performance, or estimates ofrisks and future costs and benefits. Although these statements reflect the Company’s good faith belief basedon current expectations, estimates and projections, they are subject to risks,uncertainties and assumptions and are not guarantees of futureperformance.  Important factors thatcould cause actual results to differ materially from the forward-lookingstatements we make in this Quarterly Report on Form 10-Q include, but are notlimited to, the following:**

·                                          **the Company’s potential growth, including its entrance or expansioninto new markets, and the need for sufficient capital to support that growth;**

·                                          **the Company’s ability to successfully integrate the operations of anybranches or banks acquired by it and to retain the customers of any suchacquired branch or bank;**

·                                          **changes in the quality or composition of the Company’s loan orinvestment portfolios, including adverse developments in borrower industries orin the repayment ability of individual borrowers or issuers;**

·                                          **an insufficient allowance for loan losses as a result of inaccurateassumptions;**

·                                          **changes in interest rates, yield curves and interest rate spreadrelationships;**

·                                          **the strength of the economies in the Company’s target market areas, aswell as general economic, market or business conditions;**

·              **changes indemand for loan products and financial services;**

·              **increasedcompetition or market concentration;**

·              **concentrationof credit exposure;**

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

**·              other circumstances, many of whichmay be beyond the Company’s control.**

**If one ormore of these risks or uncertainties materialize, or if any of the Company’sunderlying assumptions prove incorrect, the Company’s actual results,performance or achievements may vary materially from future results,performance or achievements expressed or implied by these forward-lookingstatements.  All forward-lookingstatements included in this Quarterly Report on Form 10-Q are expresslyqualified in their entirety by the cautionary statements in this section and tothe more detailed risk factors included in the Company’s Annual Report on Form10-K.  The Company does not intend to andassumes no responsibility for updating or revising any forward-lookingstatements contained in or incorporated by reference into this Quarterly Reporton Form 10-Q, whether as a result of new information, future events orotherwise.**

13

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**Presentation of Amounts**

**Alldollar amounts set forth below, other than per-share amounts, 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.  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 which has its main office in Knox County,Tennessee, and a trust and money management function doing business asPresidents Trust from an office in Wilson County, Tennessee.

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 June 30, 2006, the Bank hadthree Middle Tennessee Bank & Trust branches in the Nashville area.

The Company openeda branch in Knoxville, Tennessee in late 2003 and expects to open its secondbranch in that city during 2006.

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 could resultin the Company 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,Nashville and Chattanooga, Tennessee are highly desirable areas with respect toexpansion and growth plans.

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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 of 2005established its High Performance Checking Program which has allowed it tocontinue to generate a significant number of core transaction accounts withsignificant balances.

Inaddition to the Company’s business model, which is summarized in the paragraphsabove, the Company is continuously investigating and analyzing other lines andareas of business.  These include, butare not limited to, various types of insurance and real estate activities.Conversely, the Company frequently evaluates and analyzes the profitability,risk factors and viability of its various business lines and segments and,depending upon the results of these evaluations and analyses, may conclude 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.

**Overview**

The Company’sresults of operations for the three and six months ended June 30, 2006,compared to the same period in 2005, reflected an increase in net interest incomedue primarily to organic loan growth, higher interest rates as a result ofactions 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 Company’s expansion initiatives.

Reflectingimproved credit quality offset in part by strong loan growth the Company’sprovision for loan losses decreased for the six months ended June 30, 2006 ascompared to the same period in 2005. The provision for loan loss for the threemonths ended June 30, 2006 increased by $184 from the same period in 2005,reflecting strong loan growth offset in part by improved credit quality.

The Company’s netinterest margin for the quarter and six months ended June 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 June 30, 2006,the Company had total consolidated assets of approximately $1,665,630, totalconsolidated deposits of approximately $1,283,606, total consolidated loans,net of unearned interest, of approximately $1,437,935, and total consolidatedshareholders’ equity of approximately $176,889. The Company’s annualized return on average shareholders’ equity for thethree and six months ended June 30, 2006, was 12.43% and 12.15%, respectively,and its return on average total assets for the same periods was 1.34% and1.31%, respectively.  The Company expectsthat its total assets, total consolidated deposits, total consolidated loans,net of unearned interest and total shareholders’ equity will continue toincrease over the remainder of 2006 as a result of its expansion efforts,including its branch expansions in the Middle Tennessee, Knoxville, andClarksville markets.

**CriticalAccounting Policies and Estimates**

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

Managementcontinually evaluates the Company’s accounting policies and estimates it usesto prepare the consolidated financial statements.  In general, management’s estimates are basedon 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 $20,834, or 1.45%, of total loans, net of unearned interest, wasan adequate estimate of losses within the loan portfolio as of June 30, 2006.  This estimate resulted in a provision forloan losses on the income statement of $1,244 and $2,308, respectively, for thethree and six months ended June 30, 2006. If the mix and amount of future charge-off percentages differsignificantly from those assumptions used by management in making itsdetermination, the allowance for loan losses and provision for loan losses onthe 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.

**Changes in Results ofOperations**

**Netincome. **Net income forthe three months ended June 30, 2006 was $5,483 as compared to $3,714 for thesame period in 2005. This increase of $1,769, or 47.63%, resulted primarilyfrom a $3,701, or 26.30%, 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 $2,257, or 21.66%, increase in total noninterestexpense from $10,422 for the three months ended June 30, 2005 to $12,679 forthe same period of 2006. This increase is also primarily attributable to theCompany’s expansion initiatives, as discussed above.

Net income for thesix months ended June 30, 2006 was $10,579 as compared to $6,649 for the sameperiod in 2005.  The increase of $3,930,or 59.11%, reflects substantially the same trends that existed during thequarter ended June 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 June 30, 2006, net interest incomewas $17,773 as compared to $14,072 for the same period in 2005, representing anincrease of 26.30%.

The Company’saverage balance for interest-earning assets increased 20.38% from $1,234,493for the three months ended June 30, 2005 to $1,486,031 for the three monthsended June 30, 2006. The Company experienced a 25.12% growth in average loanbalances from $1,140,537 for the three months ended June 30, 2005 to $1,426,984for the three months ended June 30, 2006. The growth in loans can be attributedto the Company’s expansion initiatives, including the Clarksville transaction,that occurred in the fourth quarter of 2005.

The Company’saverage balance for interest bearing liabilities increased 17.60% from$1,095,925 for the three months ended June 30, 2005 to $1,288,822 for the firstquarter ended June 30, 2006. The Company experienced a 13.09% growth in averageinterest bearing deposits from $999,911 for the three months ended June 30,2005 to $1,130,840 for the three months ended June 30, 2006. The Company’sexpansion initiatives, including the Clarksville transaction, and the implementationof the High Performance Checking program, are the primary reasons for thegrowth in deposits.

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The Company’syield on loans (the largest component of interest-earning assets) increased by83 basis points from the three months ended June 30, 2005 to the three monthsended June 30, 2006. The increase was primarily a result of the increases bythe FOMC in the discount rate as follows:

 
| **FOMC Meeting** | ** ** | **Beginning** | ** ** | ** **   | ** ** | **Ending** | ** ** |
|-----------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **Date**              | ** ** | **Rate**      | ** ** | **Increase** | ** ** | **Rate**   | ** ** |
| May 3, 2005           |       | 2.75          | %          | 0.25         | %          | 3.00       | %          |
| June 30, 2005         |       | 3.00          | %          | 0.25         | %          | 3.25       | %          |
| 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       | %          |

 

The Company’s costof interest-bearing liabilities increased by 91 basis points from the threemonths ended June 30, 2005 to the three months ended June 30, 2006. The cost ofraising deposits and other borrowed funds are influenced by both local marketconditions as well as FOMC actions. Management believes that these costs were prudently managed during thisvolatile interest rate cycle.

For the six monthsended June 30, 2006, net interest income increased by $7,560, or 27.59%, to$34,959 from $27,399 for the same period in 2005, and the same trends outlinedabove with respect to the three months ended June 30, 2006 were observed.

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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 periodspresented.

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **June 30,**                | ** ** |
| ** **                                                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | **Average**                      | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                                   | ** ** | **Balance**                      | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **Interest-earning  assets:**                                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)                                                                     |       | $                                | 1,426,984  |   | $ | 27,781 |   | 7.81 | % | $ | 1,140,537 |   | $ | 19,851 |   | 6.98 | % |
| Investment  securities                                                       |       | 54,571                           |       | 649 |   | 4.77 | % | 60,691 |   | 592 |   | 3.91 | % |
| Other short-term  investments                                                |       | 4,476                            |       | 59 |   | 5.29 | % | 33,265 |   | 260 |   | 3.13 | % |
| Total interest-earning assets                                                |       | $                                | 1,486,031  |   | $ | 28,489 |   | 7.69 | % | $ | 1,234,493 |   | $ | 20,703 |   | 6.73 | % |
| Noninterest  earning assets                                                  |       | 146,520                          |       |   |   |   |   | 104,107 |   |   |   |   |   |
| Total assets                                                                 |       | $                                | 1,632,551  |   |   |   |   |   | $ | 1,338,600 |   |   |   |   |   |
|                                                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                    |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Now accounts,  money market and savings                                      |       | $                                | 505,383    |   | $ | 2,680 |   | 2.13 | % | $ | 401,441 |   | $ | 1,161 |   | 1.16 | % |
| Time deposits                                                                |       | 625,457                          |       | 5,967 |   | 3.83 | % | 598,470 |   | 4,340 |   | 2.91 | % |
| Total interest-bearing deposits                                              |       | $                                | 1,130,840  |   | $ | 8,647 |   | 3.07 | % | $ | 999,911 |   | $ | 5,501 |   | 2.21 | % |
|  Securities sold under repurchase agreements  and short-term borrowings |       | 34,783                           |       | 397 |   | 4.58 | % | 15,014 |   | 95 |   | 2.54 | % |
| Notes payable                                                                |       | 109,796                          |       | 1,414 |   | 5.17 | % | 70,656 |   | 879 |   | 4.99 | % |
| Subordinated  debentures                                                     |       | 13,403                           |       | 258 |   | 7.72 | % | 10,344 |   | 156 |   | 6.05 | % |
| Total interest-bearing liabilities                                           |       | $                                | 1,288,822  |   | $ | 10,716 |   | 3.34 | % | $ | 1,095,925 |   | $ | 6,631 |   | 2.43 | % |
| ** **                                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Noninterest  bearing liabilities:**                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                              |       | 148,937                          |       |   |   |   |   | 116,436 |   |   |   |   |   |
| Other  liabilities                                                           |       | 18,396                           |       |   |   |   |   | 12,942 |   |   |   |   |   |
| Total  noninterest bearing liabilities                                       |       | 167,333                          |       |   |   |   |   | 129,378 |   |   |   |   |   |
| Total  liabilities                                                           |       | 1,456,155                        |       |   |   |   |   | 1,225,303 |   |   |   |   |   |
| Shareholders’  equity                                                   |       | 176,396                          |       |   |   |   |   | 113,297 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity                             |       | $                                | 1,632,551  |   |   |   |   |   | $ | 1,338,600 |   |   |   |   |   |
|                                                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                                         |       |                             |       | $ | 17,773 |   |   |   |   |   | $ | 14,072 |   |   |   |
|                                                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate  spread                                                        |       |                             |       |   |   | 4.35 | % |   |   |   |   | 4.30 | % |
|                                                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest-earning assets                                        |       |                             |       |   |   | 4.80 | % |   |   |   |   | 4.57 | % |

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

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| ** **                                                             | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                             | ** ** | **June 30,**              | ** ** |
| ** **                                                             | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **Average**                    | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                             | ** ** | **Balance**                    | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **Interest-earning  assets:**                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)                                                               |       | $                              | 1,409,788  |   | $ | 53,881 |   | 7.71 | % | $ | 1,110,231 |   | $ | 37,930 |   | 6.89 | % |
| Investment securities                                                  |       | 55,503                         |       | 1,280 |   | 4.65 | % | 55,874 |   | 1,065 |   | 3.84 | % |
| Other short-term investments                                           |       | 3,928                          |       | 95 |   | 4.88 | % | 33,694 |   | 443 |   | 2.65 | % |
| Total interest-earning assets                                          |       | $                              | 1,469,219  |   | $ | 55,256 |   | 7.58 | % | $ | 1,199,799 |   | $ | 39,438 |   | 6.63 | % |
| Noninterest earning assets                                             |       | 146,829                        |       |   |   |   |   | 103,339 |   |   |   |   |   |
| Total assets                                                           |       | $                              | 1,616,048  |   |   |   |   |   | $ | 1,303,138 |   |   |   |   |   |
|                                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                                     |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                              |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Now accounts,  money market and savings                                |       | $                              | 513,060    |   | $ | 5,256 |   | 2.07 | % | $ | 395,246 |   | $ | 2,027 |   | 1.03 | % |
| Time deposits                                                          |       | 625,750                        |       | 11,433 |   | 3.68 | % | 561,428 |   | 7,736 |   | 2.78 | % |
| Total interest-bearing deposits                                        |       | $                              | 1,138,810  |   | $ | 16,689 |   | 2.96 | % | $ | 956,674 |   | $ | 9,763 |   | 2.06 | % |
| Securities sold under repurchase agreements and  short-term borrowings |       | 28,267                         |       | 604 |   | 4.31 | % | 16,712 |   | 184 |   | 2.22 | % |
| Notes payable                                                          |       | 99,071                         |       | 2,504 |   | 5.10 | % | 76,413 |   | 1,797 |   | 4.74 | % |
| Subordinated debentures                                                |       | 13,403                         |       | 500 |   | 7.52 | % | 10,327 |   | 295 |   | 5.76 | % |
| Total interest-bearing liabilities                                     |       | $                              | 1,279,551  |   | $ | 20,297 |   | 3.20 | % | $ | 1,060,126 |   | $ | 12,039 |   | 2.29 | % |
| **Noninterest  bearing liabilities:**                                  |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                        |       | 144,515                        |       |   |   |   |   | 116,644 |   |   |   |   |   |
| Other liabilities                                                      |       | 17,856                         |       |   |   |   |   | 14,235 |   |   |   |   |   |
| Total  noninterest bearing liabilities                                 |       | 162,371                        |       |   |   |   |   | 130,879 |   |   |   |   |   |
| Total  liabilities                                                     |       | 1,441,922                      |       |   |   |   |   | 1,191,005 |   |   |   |   |   |
| Shareholders’  equity                                             |       | 174,126                        |       |   |   |   |   | 112,133 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity                       |       | $                              | 1,616,048  |   |   |   |   |   | $ | 1,303,138 |   |   |   |   |   |
|                                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                                   |       |                           |       | $ | 34,959 |   |   |   |   |   | $ | 27,399 |   |   |   |
|                                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate  spread                                                  |       |                           |       |   |   | 4.38 | % |   |   |   |   | 4.34 | % |
|                                                                   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest-earning assets                                  |       |                           |       |   |   | 4.80 | % |   |   |   |   | 4.61 | % |

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(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 six month periods ended June 30, 2006, loan charge-offs were $790and $1,813, respectively, and recoveries of charged-off loans were $297 and$600, respectively. The Company’s provision for loan losses increased by $184,or 17.36%, to $1,244 for the three months ended June 30, 2006, as compared to$1,060 for the same periods in 2005. For the six months ended June 30, 2006 theprovision decreased by $374, or 13.94%, to $2,308 from $2,682 for the sixmonths ended June 30, 2005. The Company’s allowance for loan losses increasedby $1,095 to $20,834 at June 30, 2006 from $19,739 at December 31, 2005, whilethe ratio of the allowance for loan losses to total loans, net of unearnedincome, remained relatively constant at 1.45% at June 30, 2006 compared to1.43% and 1.46% at December 31, 2005 and June 30, 2005, respectively. As ofJune 30, 2006, indicators of credit quality, as discussed below, have improvedcompared to December 31, 2005 and June 30, 2005. Management continuallyevaluates the Company’s credit policies and procedures for effective risks andcontrols management.  The Company’s trend in asset quality improvement isattributable to improved underwriting policies and management controls. The ratio of allowance for loan losses to nonperforming loans was 426.84%,296.56% and 235.95% at June 30, 2006, December 31, 2005 and June 30, 2005,respectively, and the ratio of nonperforming assets to total assets was 0.47%,0.65% and 0.69% at June 30, 2006, December 31, 2005 and June 30, 2005,respectively. The ratio of nonperforming loans to total loans, net of unearnedinterest, was 0.34%, 0.49% and 0.62% at June 30, 2006, December 31, 2005 andJune 30, 2005, respectively.  Within theBank, the Company’s largest subsidiary, the ratio of nonperforming assets tototal assets was 0.43%, 0.59% and 0.64% at June 30, 2006, December 31, 2005 andJune 30, 2005, respectively.

The Company’syear-to-date (“YTD”) annualized net charge-offs for June 30, 2006 were $2,426compared to actual net charge-offs of $3,814 for the year ended December 31,2005.  YTD annualized net charge-offs as a percentage of averageloans improved from 0.27% for the six months ended June 30, 2005 to 0.17% forthe six months ended June 30, 2006.  Netcharge-offs as a percentage of average loans were 0.32% for the year endedDecember 31, 2005.  Within theBank, annualized net charge-offs as a percentage of average loans fell slightlyfrom 0.16% for the six months ended June 30, 2005 to 0.12% for the same periodin 2006. Net charge-offs within the Bank as a percentage of average loans were0.21% for the year ended December 31, 2005. YTD annualized net charge-offs in the Bank for June 30, 2006 were $1,638compared to actual net charge-offs of $2,490 for the year ended December 31,2005. YTD annualized net charge-offs in Superior Financial for June 30,2006 were $143 compared to actual net charge-offs of $441 for the year endedDecember 31, 2005. YTD annualized net charge-offs in GCB Acceptance for June30, 2006 were $645 compared to actual net charge-offs of $883 for the yearended December 31, 2005. At this point, management believes that totalcharge-offs for 2006 in Superior Financial and GBC Acceptance will slightlyimprove compared to 2005 charge-offs****based on assetquality trends.

Based on the Company’sallowance for loan loss calculation andreview of the loan portfolio, management believes the allowance for loan lossesis adequate at June 30, 2006.  Managementanticipates that the provision for loan losses during the third quarter of 2006will be consistent with the second quarter of 2006 and also anticipates thatthe provision for loan losses for the entire year of 2006 may be less than theprovision for 2005 if indicators of credit quality remain stabilized.  However, the provision for loan losses couldincrease for the entire year of 2006, as compared to 2005, if the Company’sloan growth continues at the rate experienced through the six months ended June30, 2006.

**Noninterest Income. **Income that is not related tointerest-earning assets, consisting primarily of service charges, commissionsand fees, has become an important supplement to the Company’s traditionalmethod of earning income through interest rate spreads.

Total noninterestincome for the three and six months ended June 30, 2006 was $5,028 and $9,783as compared to $3,463 and $6,639, respectively, for the same periods in 2005.Service charges, commissions and fees remain the largest component of totalnoninterest income and increased from $2,836 and $4,978 for the three and sixmonths, respectively, ended June 30, 2005 to $4,001 and $7,232, respectively,for the same periods in 2006. This increase primarily reflects additionalservice charges and NSF fees from deposit-related products stemming primarilyfrom increased volume as a result of the Bank’s High Performance CheckingProgram introduced in the first quarter of 2005 and also its expansionefforts.  The Company believes thatnoninterest income will continue to improve over the second half 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 $400 and $890 to $1,027 and $2,551 for thethree and six months ended June 30, 2006, respectively, from $627 and $1,661for the same periods in 2005.  Theincrease is primarily attributable to increased fees from the sale of mutual fundsand annuities, income from our check provider and a gain on the sale offoreclosed equipment.

20

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** **

**NoninterestExpense.**  Control ofnoninterest expense also is an important aspect in enhancing income.Noninterest expense includes personnel, occupancy, and other expenses such asdata processing, printing and supplies, legal and professional fees, postage,FDIC assessment, etc. Total noninterest expense was $12,679 and $25,385 for thethree and six months ended June 30, 2006 compared to $10,422 and $20,697 forthe same periods in 2005. The $2,257, or 21.66%, increase in total noninterestexpense for the three months ended June 30, 2006 compared to the same period of2005 principally reflects increases in all expense categories primarily as aresult of the Company’s expansion program as well as costs associated with theBank’s High Performance Checking Program, which the Company expects willcontinue for the remainder of 2006. This program is designed to generatesignificant numbers and balances of core transaction accounts.

Similarly, the$4,688 or 22.65%, increase in total noninterest expense for the six monthsended June 30, 2006 compared to the same period in 2005 reflects substantiallythe same trends that existed during the quarter ended June 30, 2006.

Personnel costs are theprimary element of the Company’s noninterest expenses. For the three and sixmonths ended June 30, 2006, salaries and benefits represented $6,266, or49.42%, and $12,657, or 49.86%, respectively, of total noninterest expense.This was an increase of $1,167, or 22.89%, and $2,313, or 22.36%, respectively,from the $5,099 and $10,344 for the three and six months ended June 30,2005.  Including Bank branches andnon-bank office locations, the Company had 60 locations at June 30, 2006 and atDecember 31, 2005, as compared to 53 at June 30, 2005, and the number offull-time equivalent employees increased 25.05% from 487 at June 30, 2005 to609 at June 30, 2006.  These increases inpersonnel costs, number of branches and employees are primarily the result ofthe Company’s expansion initiative and are expected to increase for theremainder of 2006 as a result of the Bank’s acquisition of five Clarksville,Tennessee branches from Old National Bank and continued expansion efforts inthe Nashville area and Knoxville.

Effective January 1, 2006, the Company adopted SFASNo. 123R “Share-Based Payment.” SFAS No. 123R requires recognition of the costof employee services received in exchange for an award of equity incentives inthe financial statements over the period the employee is required to performthe services in exchange for the award (presumptively the vesting period).  The Company adopted SFAS No. 123R using themodified prospective application as permitted under SFAS No. 123R.  Accordingly, prior period amounts have notbeen restated.  Under this application,the Company is required to record compensation expense for all awards grantedafter the date of adoption and for the unvested portion of previously grantedawards 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 of grant.  The compensation cost that was chargedagainst income for our stock option plans was $93 and $185 for the three andsix month periods ended June 30, 2006. The amount of compensation cost that would have been recognized for thethree and six month periods ended June 30, 2005 if SFAS No. 123 had beenadopted was $148 and $214.  The totalcompensation cost related to nonvested awards not yet recognized at June 30,2006 is $1,210 which will be recognized over the weighted average period ofapproximately 2.9 years.  See “Note 2 —Stock Compensation” in the consolidated financial statements for furtherinformation.

The Company’sefficiency ratio improved from 60.81% at June 30, 2005 to 56.74% at June 30,2006. The improvement in the efficiency ratio is a result of the higher levelof earnings generated given the current operating infrastructure in place inthe six month period ended June 30, 2006 versus the higher initial start upcosts incurred in the six month period ended June 30, 2005 relating to the company’sHigh Performance Checking promotion plus the initial costs incurred inexpanding the company’s presence in Middle Tennessee.  The efficiency ratio illustrates how much itcost the Company to generate revenue; for example, it cost the Company 56.74cents to generate one dollar of revenue for the six months ended June 30, 2006.

**IncomeTaxes. **The effectiveincome tax rate for the three and six months ended June 30, 2006 was 38.24% and37.95%, respectively, compared to 38.64% and 37.63% for the same periods in2005.

**Changesin Financial Condition**

Total assets atJune 30, 2006 were $1,665,630, an increase of $45,641, or 2.82%, from totalassets of $1,619,989 at December 31, 2005. The increase in assets was primarilyreflective of the $59,293, or 4.30%, increase 

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in loans, net of unearnedinterest, and was funded by federal funds purchased, repurchase agreements andFHLB borrowings.

At June 30, 2006, loans,net of unearned interest were $1,437,935 compared to $1,378,642 at December 31,2005, an increase of $59,293, or 4.30%, from December 31, 2005. The increase inloans during the first six months of 2006 primarily reflects an increase incommercial real estate loans and commercial loans.

Non-performing loansinclude non-accrual loans and loans 90 or more days past due. All loans thatare 90 days past due are considered non-accrual unless they are adequatelysecured and there is reasonable assurance of full collection of principal andinterest. Non-accrual loans that are 120 days past due without assurance ofrepayment are charged off against the allowance for loan losses. Nonaccrual loans and loans past due 90 days andstill accruing decreased by $1,843, or 27.41%, during the six months ended June30, 2006 to $4,881 from $6,724 at December 31, 2005.  At June 30, 2006, the ratio of theCompany’s allowance for loan losses to non-performing assets (which includenon-accrual loans) was 263.55%.

The Company maintains aninvestment portfolio to provide liquidity and earnings. Investments at June 30,2006 with an amortized cost of $47,781 had a market value of $47,513. AtDecember 31, 2005, investments with an amortized cost of $52,844 had a marketvalue of $52,202. The decrease in investments from December 31, 2005 to June30, 2006 results from the maturity of various securities that the Companydecided not to reinvest.

**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 8.16% of the total liquidity base at June30, 2006, as compared to 9.49% at December 31, 2005. The liquidity base isgenerally defined to include deposits, repurchase agreements, notes payable andsubordinated debentures.  In addition,the Company maintains borrowing availability with the Federal Home Loan Bank ofCincinnati (“FHLB”) of approximating $10 at June 30, 2006. The Company alsomaintains federal funds lines of credit totaling $126,000 at nine correspondentbanks, of which $100,000 was available at June 30, 2006. The Company believesit has sufficient liquidity to satisfy its current operating needs.

For the six monthsended June 30, 2006, operating activities of the Company provided $10,984 ofcash flows. Net income of $10,579 comprised a substantial portion of the cashgenerated from operations.  Cash flowsfrom operating activities were also positively affected by various non-cashitems, including (i) $2,308 in provision for loan losses, and (ii) $2,077 ofdepreciation and amortization. These increases in cash flows were offset by (i)$492 decrease in accrued interest payable and other liabilities, (ii) $2,724increase in other assets, and (iii) deferred tax benefit of $874. In addition,the cash flows provided by the proceeds from sales of mortgage loans exceededthe cash flows used by the originations of mortgage loans held for sale by$1,023.

The Company’s netincrease in loans used $62,397 in cash flows and was the primary component ofthe $59,126 in net cash used in investing activities for the six months endedJune 30, 2006. In addition, the Company purchased $5,948 in investmentsecurities available for sale. This was offset by (i) $985 in proceeds from thesale of investments securities available for sale (ii) $9,386 in proceeds fromthe maturities of investment securities available for sale, and (iii) $640 inproceeds from the maturities of securities held to maturity. Purchases of fixedasset additions, net of proceeds from sale of other real estate, used $1,737 incash flows.

Proceeds from notespayable of $195,900 and increases in federal funds purchased and repurchaseagreements of $33,635 were the primary source of cash flows from financingactivities.  These cash flows wereoffset, in part, by the excess of repayments of notes payable in the amount of$177,765 and a decrease in deposits of $12,273. In addition, dividends paid inthe amount of $2,348 further reduced the total net cash provided from financingactivities.

**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 

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business opportunitieswhile maintaining the level of resources deemed appropriate by management ofthe Company to address business risks inherent in the Company’s dailyoperations.

On September 25, 2003,the Company issued $10,310 of subordinated debentures, as part of a privatelyplaced pool of trust preferred securities. The securities, due in 2033, bear interest at a floating rate of 2.85%above the three-month LIBOR rate, reset quarterly, and are callable in fiveyears 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 June 30, 2006 was $176,889, an increase of $8,868, or 5.28%, from$168,021 on December 31, 2005. The increase in shareholders’ equity primarilyreflected net income for the six months ended June 30, 2006 of $10,579 ($1.07per share, assuming dilution). This increase was offset by quarterly dividendpayments during the six months ended June 30, 2006 totaling $2,348 ($0.24 pershare).

On September 18, 2002 the Company announced that itsBoard of Directors had authorized the repurchase of up to $2,000 of the Company’soutstanding shares of common stock beginning in October2002. The repurchase plan was renewed by the Board of Directors in September2003. On June 4, 2005 the Company announced that its Board of Directors hadapproved an increase in the amountauthorized to be repurchased from $2,000 to $5,000. The repurchase plan isdependent 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 primarysource of liquidity is dividends paid by the Bank.  Applicable Tennessee statutes and regulationsimpose restrictions on the amount of dividends that may be declared by theBank. Further, any dividend payments are subject to the continuing ability ofthe Bank to maintain its compliance with minimum federal regulatory capitalrequirements and to retain its characterization under federal regulations as a “well-capitalized”institution.

Risk-based capitalregulations adopted by the Board of Governors of the Federal Reserve Board (“FRB”)and the Federal Deposit Insurance Corporation (the “FDIC”) require bank holdingcompanies and banks, respectively, to achieve and maintain specified ratios ofcapital to risk-weighted assets. The risk-based capital rules are designed tomeasure Tier 1 Capital and Total Capital in relation to the credit risk of bothon- and off-balance sheet items.  Underthe guidelines, 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 guidelines also specifythat bank holding companies that are experiencing internal growth or makingacquisitions will be expected to maintain strong capital positionssubstantially above the minimum supervisory levels. At June 30, 2006, the Bankand 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 June 30, 2006. 

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| ** **                 | ** ** | **Required** | ** ** | **Required**              | ** ** | ** **  | ** ** | ** **  | ** ** |
|----------------------------|------------|--------------|------------|---------------------------|------------|-------------|------------|-------------|------------|
| ** **                 | ** ** | **Minimum**  | ** ** | **to be**            | ** ** | ** **  | ** ** | ** **  | ** ** |
| ** **                 | ** ** | **Ratio**    | ** ** | **Well Capitalized** | ** ** | **Bank**    | ** ** | **Company** | ** ** |
| Tier 1  risk-based capital |       | 4.00%        |       |  6.00%               |       | 10.23%      |       | 10.30%      |       |
| Total risk-based  capital  |       | 8.00%        |       | 10.00%                    |       | 11.48%      |       | 11.55%      |       |
| Leverage Ratio             |       | 4.00%        |       |  5.00%               |       |  9.41% |       |  9.49% |       |

 

The FRB hasrecently issued regulations which will allow continued inclusion of outstandingand prospective issuances of trust preferred securities as Tier 1 capitalsubject to stricter quantitative and qualitative limits than allowed underprior regulations.  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-Balance Sheet Arrangements**

At June 30, 2006, the Company had outstanding unused lines of credit and standby letters of credit totaling $431,886 and unfunded loan commitments outstanding of $76,465.  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 June 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 June 30, 2006, which by their terms have contractual maturity dates subsequent to June 30, 2006:
| ** **                                  | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | **More than** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| ** **                                  | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years**   | ** ** | **Total**  | ** ** |
| Commitments to  make loans — fixed     |       | $                  | 29,529     |               | $          | —             |       | $                  | —     |       | $          | — |   | $ | 29,529 |   |
| Commitments to  make loans — variable. |       | 46,936             |       | —             |       | —             |       | —             |       | 46,936     |       |
| Unused lines of  credit                     |       | 273,190            |       | 74,462             |       | 5,659              |       | 46,129             |       | 399,440    |       |
| Letters of  credit                          |       | 15,485             |       | 16,961             |       | —             |       | —             |       | 32,446     |       |
| Total                                       |       | $                  | 365,140    |               | $          | 91,423             |       | $                  | 5,659      |       | $          | 46,129 |   | $ | 508,351 |   |

 

**Disclosure of ContractualObligations**

In the ordinary courseof operations, 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   June 30, 2006:
| ** **                          | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | **More than** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| ** **                          | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years**   | ** ** | **Total**  | ** ** |
| Deposits without  a stated maturity |       | $                  | 648,131    |               | $          | —             |       | $                  | —     |       | $          | — |   | $ | 648,131 |   |
| Certificate of  deposits            |       | 522,109            |       | 58,754             |       | 49,322             |       | 5,290              |       | 635,475    |       |
| Repurchase  agreements              |       | 25,133             |       | —             |       | —             |       | —             |       | 25,133     |       |
| FHLB advances  and notes payable    |       | 60,778             |       | 791                |       | 55,344             |       | 6,368              |       | 123,281    |       |
| Subordinated  debentures            |       | —             |       | —             |       | —             |       | 13,403             |       | 13,403     |       |
| Operating lease  obligations        |       | 593                |       | 757                |       | 279                |       | 283                |       | 1,912      |       |
| Deferred  compensation              |       | 495                |       | 1,356              |       | —             |       | 1,062              |       | 2,913      |       |
| Purchase obligations                |       | 45                 |       | —             |       | —             |       | —             |       | 45         |       |
| Total                               |       | $                  | 1,257,284  |               | $          | 61,658             |       | $                  | 104,945    |       | $          | 26,406 |   | $ | 1,450,293 |   |

 

24

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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 or capitalresources of the Company.

**Effect of New AccountingStandards**

In November 2005, the Financial Accounting StandardsBoard (FASB) issued Staff Position (FSP) FAS 115-1 and FAS 124-1, *the Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments,*which amends SFAS No. 115,*Accounting for Certain Investments in Debtand Equity Securities,*and No. 124, *Accounting for Certain Investments Held by Not-for-ProfitOrganizations,* 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 issued SFAS No. 154, *Accounting Changes and Error Corrections.*Thisstatement replaces APB Opinion No. 20, *AccountingChanges*and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements.*SFASNo. 154 changes the requirements for the accounting for and reporting of avoluntary change in accounting principle. SFAS No. 154 requiresretrospective application to prior periods for changes in accounting principlesor error corrections, unless it is impractical to determine the period-specificeffects or when a pronouncement includes specific transition provisions. ThisStatement is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. The adoption of SFASNo. 154 (revised 2004) did not have a material impact on its financialcondition or results of operations of the Company.

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

Acomprehensive qualitative and quantitative analysis regarding market risk wasdisclosed in the Company’s Form 10-K for the year ended December 31, 2005.  No material changes in the assumptions usedin preparing, or results obtained from, the model have occurred since December31, 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 ofDisclosure Controls and Procedures**

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

25

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**Changes inInternal Control Over Financial Reporting**

There were nochanges in the Company’s internal control over financial reporting during theCompany’s fiscal quarter ended June 30, 2006 that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

**PART II - OTHER INFORMATION**

**Item1.            Legal Proceedings**

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.

**Item1A.         Risk Factors**

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 June 30, 2006.

**Item3.            Defaults upon SeniorSecurities**

None.

**Item4.            Submission of Matters toa Vote of Security Holders**

The Annual Meeting of Shareholders of the Company was held on April 26,2006. The following proposals were considered by shareholders at the AnnualMeeting:

Proposal 1 — Election of DirectorsThe following directors were re-elected:

|                            | ** ** | **Votes ** | ** ** |
|----------------------------|------------|-----------------|------------|
| ** **                 | ** ** | **For**         | ** ** | **Withheld** | ** ** | **Broker  Non-Votes** | ** ** |
| Martha M.  Bachman         |       | 7,453,953       |       | 181,275 |   | — |   |
| Charles S.  Brooks         |       | 7,389,129       |       | 246,100 |   | — |   |
| W.T. Daniels               |       | 7,439,086       |       | 196,142 |   | — |   |
| Robin Haynes               |       | 7,525,808       |       | 109,420 |   | — |   |
| Charles H.  Whitfield, Jr. |       | 7,386,305       |       | 248,923 |   | — |   |
| Robert K. Leonard          |       | 7,494,835       |       | 140,394 |   | — |   |

 

The following directors will continue in office until the annualshareholders’ meeting for the year indicated:

| Mr. Phil M. Bachman     |   | 2007   |   |
|-------------------------|--------|--------|--------|
| Mr. Terry  Leonard      |   | 2007   |   |
| Mr. Ronald E.  Mayberry |   | 2007   |   |
| Mr. Kenneth R.  Vaught  |   | 2007   |   |
|                    |   |   |   |
| Bruce Campbell          |   | 2008   |   |
| Jerald K. Jaynes        |   | 2008   |   |
| R. Stan Puckett         |   | 2008   |   |
| John Tolsma             |   | 2008   |   |

 

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**Item 5.            Other Information**

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: August 8, 2006 | By:                            | /s/ R. Stan Puckett |
|                 |                           | R. Stan Puckett |
|                 |                           | Chairman of the Board and Chief Executive Officer |
|                 |                           | (Duly authorized representative) |
|                 |                           |   |
|                 |                           |   |
| Date: August 8, 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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