**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 

**(Mark One)**

** **

| **ý**                                                                                                                                                                                                                                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                             |       |                                                                                          |
| **For the  quarterly period ended June 30, 2004**                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                                                                       |
| **OR**                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                             |       |                                                                                          |
| **o**                                                                                                                                                                                                                                                                            | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                             |       |                                                                                          |
| **For the transition period from                                         to** |
|                                                                                                                                                                                                                                                                             |       |                                                                                          |
| **Commission file number 0-14289**                                                                                                                                                                                                                                               |

** **

**GREENE COUNTY BANCSHARES, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Tennessee**                                                   | ** ** | **62-1222567**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **100 North Main Street, Greeneville,  Tennessee**              | ** ** | **37743-4992**                       |
| (Address of principal executive offices)                        |       | (Zip Code)                           |

 

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. YES ý NO o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act.) YES ýNO o

 

As of August 6, 2004, the number of sharesoutstanding of the issuer’s common stock was: 7,644,400.

 

 

----

 

**PART 1 – FINANCIAL INFORMATION**

** **

**ITEM 1.****          FINANCIALSTATEMENTS**

 
| The  unaudited condensed consolidated financial statements of the Registrant and  its wholly owned subsidiaries are as follows: |                                                                                                                                |
|---------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                            |                                                                                                                                |
|                                                                                                                            | Condensed Consolidated Balance Sheets –  June 30, 2004 and December 31, 2003.                                                  |   |
|                                                                                                                            |                                                                                                                                |   |
|                                                                                                                            | Condensed Consolidated Statements of Income  and Comprehensive Income - For the three and six months ended June 30, 2004  and 2003. |   |
|                                                                                                                            |                                                                                                                                |   |
|                                                                                                                            | Condensed Consolidated Statement of Changes  in Shareholders’ Equity – For the six months ended June 30, 2004.            |   |
|                                                                                                                            |                                                                                                                                |   |
|                                                                                                                            | Condensed Consolidated Statements of Cash  Flows - For the six months ended June 30, 2004 and 2003.                                 |   |
|                                                                                                                            |                                                                                                                                |   |
|                                                                                                                            | Notes to Condensed  Consolidated Financial Statements.                                                                              |   |

 

1

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**GREENE COUNTY BANCSHARES, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**June 30, 2004 and December 31, 2003**

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

 
| ** **                                                                                      | ** ** | **(Unaudited)  June 30,  2004** | ** ** | **December 31,  2003*** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                      |       |                            |       |                    |       |
| Cash and due from banks                                                                         |       | $                               | 32,033     |                    | $          | 36,087 |   |
| Federal funds sold                                                                              |       | 2,412                           |       | 5,254                   |       |
| Securities available for sale                                                                   |       | 27,461                          |       | 33,199                  |       |
| Securities held to maturity (with a market  value of $4,682 and $5,846)                         |       | 4,582                           |       | 5,632                   |       |
| FHLB, Bankers Bank and other stock, at cost                                                     |       | 6,097                           |       | 5,992                   |       |
| Loans held for sale                                                                             |       | 2,979                           |       | 3,546                   |       |
| Loans                                                                                           |       | 984,882                         |       | 952,225                 |       |
| Less: Allowance for loan losses                                                                 |       | (14,905                         | )          | (14,564                 | )          |
| Net loans                                                                                       |       | 969,977                         |       | 937,661                 |       |
| Premises and equipment, net                                                                     |       | 34,885                          |       | 33,886                  |       |
| Goodwill and other intangible assets                                                            |       | 20,661                          |       | 20,970                  |       |
| Other assets                                                                                    |       | 23,915                          |       | 26,295                  |       |
| Total assets                                                                                    |       | $                               | 1,125,002  |                    | $          | 1,108,522 |   |
|                                                                                            |       |                            |       |                    |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                   |       |                            |       |                    |       |
| Liabilities                                                                                     |       |                            |       |                    |       |
| Deposits                                                                                        |       | $                               | 884,014    |                    | $          | 907,115 |   |
| Repurchase agreements                                                                           |       | 14,532                          |       | 12,896                  |       |
| Notes payable                                                                                   |       | 96,662                          |       | 63,030                  |       |
| Subordinated debentures                                                                         |       | 10,310                          |       | 10,310                  |       |
| Accrued interest payable and other  liabilities                                                 |       | 13,975                          |       | 13,236                  |       |
| Total liabilities                                                                               |       | 1,019,493                       |       | 1,006,587               |       |
|                                                                                            |       |                            |       |                    |       |
| Shareholders’ equity                                                                       |       |                            |       |                    |       |
| Common stock: $2 par, 15,000,000 shares  authorized, 7,644,400 and 7,659,929 shares outstanding |       | 15,289                          |       | 15,320                  |       |
| Additional paid-in capital                                                                      |       | 24,116                          |       | 24,482                  |       |
| Retained earnings                                                                               |       | 66,237                          |       | 61,947                  |       |
| Accumulated other comprehensive income  (loss)                                                  |       | (133                            | )          | 186                     |       |
| Total shareholders’ equity                                                                 |       | 105,509                         |       | 101,935                 |       |
|                                                                                            |       |                            |       |                    |       |
| Total liabilities and shareholders’ equity                                                 |       | $                               | 1,125,002  |                    | $          | 1,108,522 |   |

 

----

* Derived from auditedconsolidated financial statements.

 

See accompanying notes.

 

2

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**GREENE COUNTY BANCSHARES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOMEAND COMPREHENSIVE INCOME**

**Three and Six Months Ended June 30, 2004 and2003**

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

** **
| ** **                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                | ** ** |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Interest income                                      |       |                             |       |                           |       |   |   |   |   |
| Interest and fees on loans                           |       | $                                | 15,522     |                           | $          | 13,721 |   | $ | 31,047 |   | $ | 27,339 |   |
| Investment securities                                |       | 339                              |       | 318                            |       | 725 |   | 644 |   |
| Federal funds sold and interest-earning  deposits    |       | 8                                |       | 43                             |       | 27 |   | 99 |   |
|                                                 |       | 15,869                           |       | 14,082                         |       | 31,799 |   | 28,082 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                     |       |                             |       |                           |       |   |   |   |   |
| Deposits                                             |       | 3,006                            |       | 3,276                          |       | 6,192 |   | 6,754 |   |
| Borrowings                                           |       | 880                              |       | 753                            |       | 1,744 |   | 1,470 |   |
|                                                 |       | 3,886                            |       | 4,029                          |       | 7,936 |   | 8,224 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Net interest income                                  |       | 11,983                           |       | 10,053                         |       | 23,863 |   | 19,858 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Provision for loan losses                            |       | 1,162                            |       | 1,729                          |       | 2,685 |   | 2,855 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Net interest income after provision for  loan losses |       | 10,821                           |       | 8,324                          |       | 21,178 |   | 17,003 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Noninterest income                                   |       |                             |       |                           |       |   |   |   |   |
| Service charges and fees                             |       | 2,518                            |       | 2,436                          |       | 4,913 |   | 4,531 |   |
| Other                                                |       | 552                              |       | 461                            |       | 1,251 |   | 1,090 |   |
|                                                 |       | 3,070                            |       | 2,897                          |       | 6,164 |   | 5,621 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Noninterest expense                                  |       |                             |       |                           |       |   |   |   |   |
| Salaries and employee benefits                       |       | 4,464                            |       | 3,884                          |       | 9,171 |   | 8,089 |   |
| Occupancy and furniture and equipment  expense       |       | 1,462                            |       | 1,124                          |       | 2,951 |   | 2,173 |   |
| Other                                                |       | 2,648                            |       | 2,684                          |       | 5,403 |   | 4,662 |   |
|                                                 |       | 8,574                            |       | 7,692                          |       | 17,525 |   | 14,924 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Income before income taxes                           |       | 5,317                            |       | 3,529                          |       | 9,817 |   | 7,700 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Provision for income taxes                           |       | 2,042                            |       | 1,228                          |       | 3,690 |   | 2,781 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Net income                                           |       | $                                | 3,275      |                           | $          | 2,301 |   | $ | 6,127 |   | $ | 4,919 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Comprehensive income                                 |       | $                                | 2,935      |                           | $          | 2,299 |   | $ | 5,808 |   | $ | 4,996 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Per share of common stock:                           |       |                             |       |                           |       |   |   |   |   |
| Basic earnings                                       |       | $                                | 0.43       |                           | $          | 0.34 |   | $ | 0.80 |   | $ | 0.72 |   |
| Diluted earnings                                     |       | 0.42                             |       | 0.33                           |       | 0.79 |   | 0.71 |   |
| Dividends                                            |       | 0.12                             |       | 0.12                           |       | 0.24 |   | 0.24 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Weighted average shares outstanding:                 |       |                             |       |                           |       |   |   |   |   |
| Basic                                                |       | 7,656,832                        |       | 6,822,235                      |       | 7,661,593 |   | 6,821,392 |   |
| Diluted                                              |       | 7,713,966                        |       | 6,905,852                      |       | 7,720,365 |   | 6,905,437 |   |

 

See accompanying notes.

 

3

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**GREENE COUNTY BANCSHARES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGESIN SHAREHOLDERS’ EQUITY**

**For Six Months Ended June 30, 2004**

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

 
| ** **                                                              | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Compre-  hensive  Income (loss)** | ** ** | **Total  Share-  holders’  Equity** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------------------|------------|------------------------------------------|------------|
|                                                                    |       |              |       |                             |       |                   |       |                                                    |       |                                     |       |
| **Balance, January 1, 2004**                                            |       | $                 | 15,320     |                             | $          | 24,482                 |       | $                                                       | 61,947     |                                     | $          | 186 |   | $ | 101,935 |   |
|                                                                    |       |              |       |                             |       |                   |       |                                                    |       |                                     |       |
| Common stock transactions:                                              |       |              |       |                             |       |                   |       |                                                    |       |                                     |       |
| Issuance of 10,171 shares under stock  option plan                      |       | 20                |       | 117                              |       | —                 |       | —                                                  |       | 137                                      |       |
| Repurchase of common stock, 25,700 shares                               |       | (51               | )          | (487                             | )          | —                 |       | —                                                  |       | (538                                     | )          |
| Tax benefit from exercise of nonincentive  stock options                |       | 4                 |       | 4                                |       |                   |       |                                                    |       |                                     |       |
| Dividends ($.24 per share)                                              |       | —            |       | —                           |       | (1,837                 | )          | —                                                  |       | (1,837                                   | )          |
| Comprehensive income:                                                   |       |              |       |                             |       |                   |       |                                                    |       |                                     |       |
| Net income                                                              |       | —            |       | —                           |       | 6,127                  |       | —                                                  |       | 6,127                                    |       |
| Change in unrealized gains (losses), net of  reclassification and taxes |       | —            |       | —                           |       | —                 |       | (319                                                    | )          | (319                                     | )          |
| Total comprehensive income                                              |       |              |       |                             |       |                   |       |                                                    |       | 5,808                                    |       |
|                                                                    |       |              |       |                             |       |                   |       |                                                    |       |                                     |       |
| **Balance, June 30, 2004**                                              |       | $                 | 15,289     |                             | $          | 24,116                 |       | $                                                       | 66,237     |                                     | $          | (133 | ) | $ | 105,509 |   |

 

See accompanying notes.

 

4

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**GREENE COUNTY BANCSHARES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**For the Six Months Ended June 30, 2004 and2003**

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

 
| ** **                                                                                 | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                 | ** ** | **(Unaudited)**    | ** ** |
|                                                                                       |       |               |       |               |       |
| **Cash flows from operating activities**                                                   |       |               |       |               |       |
| Net income                                                                                 |       | $                  | 6,127      |               | $          | 4,919 |   |
| Adjustments to reconcile net income to net  cash from operating activities                 |       |               |       |               |       |
| Provision for loan losses                                                                  |       | 2,685              |       | 2,855              |       |
| Depreciation and amortization                                                              |       | 1,499              |       | 961                |       |
| Security amortization and accretion, net                                                   |       | 47                 |       | 81                 |       |
| FHLB stock dividends                                                                       |       | (105               | )          | (92                | )          |
| Net gain on sale of mortgage loans                                                         |       | (243               | )          | (607               | )          |
| Originations of mortgage loans held for  sale                                              |       | (25,516            | )          | (44,474            | )          |
| Proceeds from sales of mortgage loans                                                      |       | 26,326             |       | 46,555             |       |
| Net losses from sales of fixed assets                                                      |       | 46                 |       | —             |       |
| Net loss on OREO and repossessed assets                                                    |       | 132                |       | 185                |       |
| Net changes:                                                                               |       |               |       |               |       |
| Other assets                                                                               |       | 2,154              |       | 1,052              |       |
| Accrued interest payable and other  liabilities                                            |       | 743                |       | (400               | )          |
| Net cash from operating activities                                                         |       | 13,895             |       | 11,035             |       |
|                                                                                       |       |               |       |               |       |
| **Cash flows from investing activities**                                                   |       |               |       |               |       |
| Net change in securities and other  interest-earning investments                           |       | 6,226              |       | (9,355             | )          |
| Increase in cash surrender value of life  insurance                                        |       | (243               | )          | (458               | )          |
| Net increase in loans                                                                      |       | (36,213            | )          | (29,138            | )          |
| Improvements to other real estate and  proceeds from sales of other real estate owned, net |       | 1,746              |       | 3,483              |       |
| Proceeds from sale of fixed assets and  fixed asset additions, net                         |       | (2,235             | )          | (1,599             | )          |
| Net cash used in investing activities                                                      |       | (30,719            | )          | (37,067            | )          |
|                                                                                       |       |               |       |               |       |
| **Cash flows from financing activities**                                                   |       |               |       |               |       |
| Net change in deposits                                                                     |       | (23,101            | )          | (14,413            | )          |
| Net change in repurchase agreements                                                        |       | 1,635              |       | 16,404             |       |
| Net change in notes payable                                                                |       | 33,632             |       | 4,717              |       |
| Dividends paid                                                                             |       | (1,837             | )          | (1,637             | )          |
| Proceeds from issuance of common stock                                                     |       | 137                |       | 37                 |       |
| Repurchase of common stock                                                                 |       | (538               | )          | —             |       |
| Net cash from financing activities                                                         |       | 9,928              |       | 5,108              |       |
|                                                                                       |       |               |       |               |       |
| **Net change in cash and cash equivalents**                                                |       | (6,896             | )          | (20,924            | )          |
|                                                                                       |       |               |       |               |       |
| Cash and cash equivalents, beginning of  year                                              |       | 41,341             |       | 62,959             |       |
|                                                                                       |       |               |       |               |       |
| **Cash and cash equivalents, end of period**                                               |       | $                  | 34,445     |               | $          | 42,035 |   |
|                                                                                       |       |               |       |               |       |
| **Supplemental disclosures – cash and noncash**                                       |       |               |       |               |       |
| Interest paid                                                                              |       | $                  | 7,715      |               | $          | 8,078 |   |
| Income taxes paid                                                                          |       | 2,570              |       | 2,960              |       |
| Loans transferred to other real estate                                                     |       | 1,516              |       | 3,907              |       |
| Unrealized gain (loss) on available for  sale securities, net of tax                       |       | (319               | )          | 77                 |       |

 

See accompanying notes.

 

5

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**GREENE COUNTY BANCSHARES, INC.**

**NOTESTO****CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 2004**

**Unaudited**

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

 

 

**NOTE1 – PRINCIPLES OF CONSOLIDATION**

 

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 footnotes 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, 2004 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2004. For further information, referto the consolidated financial statements and footnotes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2003.Certain amounts from prior period financial statements have been reclassifiedto conform to the current year’s presentation.

# ** **

# **NOTE2 – STOCK COMPENSATION**

 

Employee compensationexpense under stock option plans is reported if options are granted belowmarket price at grant date, whereas expense for options granted at market priceare reported on a pro forma basis.  Proforma disclosures of net income and earnings per share are shown below usingthe fair value method of SFAS No. 123 to measure expense for options usingthe Black-Scholes option pricing model to estimate fair value.

 

Theshareholders of the Company approved, at their annual meeting on April 22,2004, the Greene County Bancshares, Inc. 2004 Long-Term Incentive Plan (the “Plan”), for the purpose ofattracting, retaining and motivating employees, officers and directors of theCompany and to provide incentives and awards for superior performance.  The Plan reserved 500,000 shares of commonstock for issuance.  No options have yetbeen granted under the Plan.

 

Thefollowing disclosures show the effect on income and earnings per share had theoptions’ fair value been recorded using the Black-Scholes model. 

 
| ** **                                                                                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                          | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Net income:                                                                                                         |       |                             |       |                           |       |   |   |   |   |
| As reported                                                                                                         |       | $                                | 3,275      |                           | $          | 2,301 |   | $ | 6,127 |   | $ | 4,919 |   |
| Deduct: Total stock-based compensation  expense determined under fair value-based method for all awards, net of tax |       | (37                              | )          | (28                            | )          | (75 | ) | (57 | ) |
|                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Pro forma                                                                                                           |       | $                                | 3,238      |                           | $          | 2,273 |   | $ | 6,052 |   | $ | 4,862 |   |
|                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Earnings per common share:                                                                                          |       |                             |       |                           |       |   |   |   |   |
| As reported                                                                                                         |       | $                                | 0.43       |                           | $          | 0.34 |   | $ | 0.80 |   | $ | 0.72 |   |
| Pro forma                                                                                                           |       | $                                | 0.42       |                           | $          | 0.33 |   | $ | 0.78 |   | $ | 0.71 |   |
|                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings per common share:                                                                                  |       |                             |       |                           |       |   |   |   |   |
| As reported                                                                                                         |       | $                                | 0.42       |                           | $          | 0.33 |   | $ | 0.79 |   | $ | 0.71 |   |
| Pro forma                                                                                                           |       | $                                | 0.42       |                           | $          | 0.32 |   | $ | 0.78 |   | $ | 0.70 |   |

 

6

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**NOTE3 – ALLOWANCE FOR LOAN LOSSES**

 

Transactionsin the allowance for loan losses for the six months ended June 30, 2004 andtwelve months ended December 31, 2003 were as follows:

 
| ** **                      | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------|------------|--------------------|------------|------------------------|------------|
|                            |       |               |       |                   |       |
| Balance at beginning of year    |       | $                  | 14,564     |                   | $          | 12,586 |   |
| Add (deduct):                   |       |               |       |                   |       |
| Reserve acquired in acquisition |       | —             |       | 1,340                  |       |
| Provision                       |       | 2,685              |       | 5,775                  |       |
| Loans charged off               |       | (3,238             | )          | (6,797                 | )          |
| Recoveries of loans charged off |       | 894                |       | 1,660                  |       |
| Ending balance                  |       | $                  | 14,905     |                   | $          | 14,564 |   |

 
| ** **                              | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------|------------|--------------------|------------|------------------------|------------|
|                                    |       |               |       |                   |       |
| Loans past due 90 days still on accrual |       | $                  | 1,222      |                   | $          | 224 |   |
| Nonaccrual loans                        |       | 4,638              |       | 4,305                  |       |
| Total                                   |       | $                  | 5,860      |                   | $          | 4,529 |   |

 

7

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**NOTE4 – EARNINGS PER SHARE OF COMMON STOCK**

 

Basicearnings per share (EPS) of common stock is computed by dividing net income bythe weighted average number of common shares outstanding during the period.Diluted earnings per share of common stock is computed by dividing net incomeby the weighted average number of common shares and potential common shares outstandingduring the period. Stock options are regarded as potential common shares.Potential common shares are computed using the treasury stock method. For thethree and six months ended June 30, 2004, 144,165 options are excluded from theeffect of dilutive securities because they are anti-dilutive; 70,105 optionsare similarly excluded from the effect of dilutive securities for the three andsix months ended June 30, 2003.

 

The following is a reconciliation of the numerators and denominatorsused in the basic and diluted earnings per share computations for the three andsix months ended June 30, 2004 and 2003:

 
| ** **                                                        | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| ** **                                                        | ** ** | **Income  (Numerator)**         | ** ** | **Shares  (Denominator)** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** |
|                                                              |       |                            |       |   |   |   |   |   |   |
| **Basic EPS**                                                     |       |                            |       |   |   |   |   |   |   |
| Income available to common shareholders                           |       | $                               | 3,275      |   | 7,656,832 |   | $ | 2,301 |   | 6,822,235 |   |
|                                                              |       |                            |       |   |   |   |   |   |   |
| **Effect of dilutive securities**                                 |       |                            |       |   |   |   |   |   |   |
| Stock options outstanding                                         |       | —                          |       | 57,134 |   | — |   | 83,617 |   |
|                                                              |       |                            |       |   |   |   |   |   |   |
| **Diluted EPS**                                                   |       |                            |       |   |   |   |   |   |   |
| Income available to common shareholders  plus assumed conversions |       | $                               | 3,275      |   | 7,713,966 |   | $ | 2,301 |   | 6,905,852 |   |

 

 
| ** **                                                        | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                        | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| ** **                                                        | ** ** | **Income  (Numerator)**       | ** ** | **Shares  (Denominator)** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** |
|                                                              |       |                          |       |   |   |   |   |   |   |
| **Basic EPS**                                                     |       |                          |       |   |   |   |   |   |   |
| Income available to common shareholders                           |       | $                             | 6,127      |   | 7,661,593 |   | $ | 4,919 |   | 6,821,392 |   |
|                                                              |       |                          |       |   |   |   |   |   |   |
| **Effect of dilutive securities**                                 |       |                          |       |   |   |   |   |   |   |
| Stock options outstanding                                         |       | —                        |       | 58,772 |   | — |   | 84,045 |   |
|                                                              |       |                          |       |   |   |   |   |   |   |
| **Diluted EPS**                                                   |       |                          |       |   |   |   |   |   |   |
| Income available to common shareholders  plus assumed conversions |       | $                             | 6,127      |   | 7,720,365 |   | $ | 4,919 |   | 6,905,437 |   |

 

8

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**NOTE5 – SEGMENT INFORMATION**

 

**The Company’s operating segments include banking, mortgagebanking, consumer finance, subprime automobile lending and title insurance. Thereportable segments are determined by the products and services offered, andinternal reporting. Loans, investments, and deposits provide the revenues in thebanking operation, loans and fees provide the revenues in consumer finance,mortgage banking, and subprime lending and insurance commissions providerevenues for the title insurance company. Consumer finance, subprime automobilelending and title insurance do not meet the quantitative threshold on anindividual basis, and are therefore shown below in “other”. Mortgage bankingoperations are included in “Bank”.  Alloperations are domestic.**

 

Segment performance is evaluated using net interest income and noninterestincome. Income taxes are allocated based on income before income taxes, andindirect expenses (including management fees) are allocated based on time spentfor each segment. Transactions among segments are made at fair value.Information reported internally for performance assessment follows.

 
| **Three months ended June 30,  2004** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                  |       |     |       |      |       |      |       |
| Net interest income                   |       | $        | 10,504     |      | $          | 1,479     |       | $ | 11,983 |   |
| Provision for loan losses             |       | 783      |       | 379       |       | 1,162     |       |
| Noninterest income                    |       | 2,862    |       | 208       |       | 3,070     |       |
| Noninterest expense                   |       | 7,426    |       | 1,148     |       | 8,574     |       |
| Income tax expense                    |       | 1,975    |       | 67        |       | 2,042     |       |
| **Segment profit**                    |       | $        | 3,182      |      | $          | 93        |       | $ | 3,275 |   |
|                                  |       |     |       |      |       |      |       |
| **Segment assets at June 30, 2004**   |       | $        | 1,091,329  |      | $          | 33,673    |       | $ | 1,125,002 |   |

 
| **Three months ended June 30,  2003** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                  |       |     |       |      |       |      |       |
| Net interest income                   |       | $8,437   |       | $1,616    |       | $10,053   |       |
| Provision for loan losses             |       | 1,181    |       | 548       |       | 1,729     |       |
| Noninterest income                    |       | 2,558    |       | 339       |       | 2,897     |       |
| Noninterest expense                   |       | 6,457    |       | 1,235     |       | 7,692     |       |
| Income tax expense                    |       | 1,160    |       | 68        |       | 1,228     |       |
| **Segment profit**                    |       | $2,197   |       | $104      |       | $2,301    |       |
|                                  |       |     |       |      |       |      |       |
| **Segment assets at June 30, 2003**   |       | $873,846 |       | $35,255   |       | $909,101  |       |

 
| **Six months ended June 30, 2004** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                               |       |     |       |      |       |      |       |
| Net interest income                |       | $        | 20,898     |      | $          | 2,965     |       | $ | 23,863 |   |
| Provision for loan losses          |       | 1,836    |       | 849       |       | 2,685     |       |
| Noninterest income                 |       | 5,574    |       | 590       |       | 6,164     |       |
| Noninterest expense                |       | 15,203   |       | 2,322     |       | 17,525    |       |
| Income tax expense                 |       | 3,577    |       | 113       |       | 3,690     |       |
| **Segment profit**                 |       | $        | 5,856      |      | $          | 271       |       | $ | 6,127 |   |

 
| **Six months ended June 30, 2003** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                               |       |     |       |      |       |      |       |
| Net interest income                |       | $        | 16,623     |      | $          | 3,235     |       | $ | 19,858 |   |
| Provision for loan losses          |       | 1,766    |       | 1,089     |       | 2,855     |       |
| Noninterest income                 |       | 4,883    |       | 738       |       | 5,621     |       |
| Noninterest expense                |       | 12,500   |       | 2,424     |       | 14,924    |       |
| Income tax expense                 |       | 2,622    |       | 159       |       | 2,781     |       |
| Segment profit                     |       | $        | 4,618      |      | $          | 301       |       | $ | 4,919 |   |

 

9

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**Asset Quality Ratios**

 
| **As of and for the period ended  June 30, 2004**                            | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                                                         |       |     |       |      |       |      |       |
| Nonperforming loans as a percentage of total  loans                          |       | 0.52     | %          | 1.66      | %          | 0.59      | %          |
| Nonperforming assets as a percentage of  total assets                        |       | 0.74     | %          | 3.23      | %          | 0.84      | %          |
| Allowance for loan losses as a percentage  of total loans                    |       | 1.24     | %          | 6.38      | %          | 1.50      | %          |
| Allowance for loan losses as a percentage  of nonperforming assets           |       | 145.65   | %          | 254.45    | %          | 158.23    | %          |
| Annualized net charge-offs to average total  loans, net of unearned interest |       | 0.29     | %          | 4.21      | %          | 0.48      | %          |

 
| **As of and for the period ended  June 30, 2003**                            | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                                                         |       |     |       |      |       |      |       |
| Nonperforming loans as a percentage of  total loans                          |       | 0.49     | %          | 1.82      | %          | 0.59      | %          |
| Nonperforming assets as a percentage of  total assets                        |       | 0.95     | %          | 3.94      | %          | 1.10      | %          |
| Allowance for loan losses as a percentage  of total loans                    |       | 1.19     | %          | 7.24      | %          | 1.58      | %          |
| Allowance for loan losses as a percentage  of nonperforming assets           |       | 106.19   | %          | 234.34    | %          | 123.97    | %          |
| Annualized net charge-offs to average total  loans, net of unearned interest |       | 0.44     | %          | 5.91      | %          | 0.79      | %          |

 
| **As of and for the period ended  December 31, 2003**              | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                                               |       |     |       |      |       |      |       |
| Nonperforming loans as a percentage of  total loans                |       | 0.40     | %          | 1.64      | %          | 0.47      | %          |
| Nonperforming assets as a percentage of  total assets              |       | 0.68     | %          | 3.38      | %          | 0.79      | %          |
| Allowance for loan losses as a percentage  of total loans          |       | 1.24     | %          | 6.45      | %          | 1.51      | %          |
| Allowance for loan losses as a percentage  of nonperforming assets |       | 154.91   | %          | 239.41    | %          | 166.35    | %          |
| Net charge-offs to average total loans, net  of unearned interest  |       | 0.33     | %          | 5.53      | %          | 0.64      | %          |

 

10

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**NOTE6 – GOODWILL AND OTHER INTANGIBLE ASSETS**

 

**Goodwill**

 

Goodwillwas no longer amortized starting in 2002; however, it is periodically evaluatedfor impairment and no impairment was recognized during the first six months of2004.

 

Thechange in the carrying amount of goodwill for the six months ended June 30,2004 is as follows:

 
| Beginning of year                             |   | $      | 15,885 |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Goodwill from acquisition during the  quarter |   | — |   |
| End of quarter                                |   | $      | 15,885 |   |

 

**Coredeposit and other intangibles**

 

Otherintangible assets consist of core deposit intangibles arising from whole bankand branch acquisitions.  They areinitially measured at fair value and then are amortized on a straight-linemethod over their estimated useful lives, which is 10 years.

 

Coredeposit intangibles had a gross carrying amount of $6,367 for the period endedJune 30, 2004 and the year ended December 31, 2003 and accumulated amortizationof $1,590 and $1,282 for the same periods, respectively.  Aggregate amortization expense for the threeand six months ended June 30, 2004 was $154 and $308, respectively. Annualestimated amortization expense for the next five years is:

 

 
| 2004  |   | $   | 616    |   |
|-------|--------|-----|--------|--------|
| 2005  |   | 616 |   |
| 2006  |   | 506 |   |
| 2007  |   | 506 |   |
| 2008  |   | 506 |   |
| Total |   | $   | 2,750  |   |

 

11

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| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

** **

 

**Forward-LookingStatements**

 

**ThisQuarterly Report on Form 10-Q, including all documents incorporated herein byreference, contains forward-looking statements. Additional written or oralforward-looking statements may be made by the Company from time to time infilings with the Securities and Exchange Commission (“SEC”) or otherwise. Thewords “believe”, “expect”, “seek”, and “intend” and similar expressionsidentify forward-looking statements, which speak only as of the date thestatement is made.  The use of “annualized”information, which extrapolates six months actual financial results to the fullyear 2004, is also forward-looking.  Suchforward-looking statements are within the meaning of that term in Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. Such statements may include, but are notlimited to, projections of income or loss, expenditures, acquisitions, plansfor future operations, financing needs or plans relating to services of theCompany, as well as assumptions relating to the foregoing.****The Company’s actual results maydiffer materially from the results anticipated in forward-looking statementsdue to a variety of factors, including, but not limited to (1) unanticipateddeterioration in the financial condition of borrowers resulting in significantincreases in loan losses and provisions for those losses; (2) lack of sustainedgrowth in the economy in the markets that the Bank serves; (3) increasedcompetition with other financial institutions in the markets that the Bankserves; (4) changes in the legislative and regulatory environment; and (5) theloss of key personnel.**

** **

**Presentationof Amounts**

 

**All dollar amounts set forth below, other than share and per-shareamounts, as well as percentages, are in thousands unless otherwise noted.**

 

**General**

 

Greene CountyBancshares, Inc. (the “Company”) is the bank holding company for Greene CountyBank (the “Bank”), a Tennessee-chartered commercial bank that conducts theprincipal business of the Company. In addition to its commercial bankingoperations, the Bank conducts separate businesses through its threewholly-owned subsidiaries: Superior Financial Services, Inc. (“SuperiorFinancial”), a consumer finance company; GCB Acceptance Corporation (“GCBAcceptance”), a subprime automobile lending company; and Fairway Title Co., atitle company formed in 1998. The Bank also operates a mortgage bankingoperation which has its main office in Knox County, Tennessee and thisoperation also has representatives located throughout the Company’s branchsystem.

 

On November 21, 2003, the Company entered the Middle Tennessee marketby completing its acquisition of Gallatin, Tennessee-based IndependentBankshares Corporation (“IBC”).  IBC wasthe bank holding company for First Independent Bank, which had four offices inGallatin and Hendersonville, Tennessee, and Rutherford Bank and Trust, withthree offices in Murfreesboro and Smyrna, Tennessee.  First Independent Bank and Rutherford Bankand Trust were subsequently merged with the Bank, with the Bank as thesurviving entity.  The Company completedthe IBC system conversion process during the latter part of the quarter endedMarch 31, 2004.

 

**Growthand Business Strategy**

 

The Company expects that, over the intermediateterm, its growth from mergers and acquisitions, including acquisitions of bothentire financial institutions and selected branches of financial institutions,will continue.  With respect to theacquisition of entire financial institutions, the Company is focusing oninstitutions with assets between $100 million and $400 million.  De novo branching is also expected to be amethod of growth, particularly in high-growth and otherdemographically-desirable markets.

 

The Company’s strategic plan outlines a geographic expansion policywithin a 300-mile radius of Greene County, Tennessee. This policy 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

 

12

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Kentucky.In particular, the Company believes the markets in and around Knoxville andNashville, Tennessee are highly desirable areas with respect to expansion andgrowth plans.

 

TheCompany is continuously investigating and analyzing other lines and areas ofbusiness.  These include, but are notlimited to, various types of insurance, real estate activities, etc.Conversely, the Company frequently evaluates and analyzes the profitability,risk factors and viability of its various business lines and segments and,depending upon the results of these evaluations and analyses, may conclude toexit certain segments and/or business lines. Further, in conjunction with theseongoing evaluations and analyses, the Company may decide to sell, merge orclose certain branch facilities.

 

 

**Overview**

 

The Company’s results ofoperations for the second quarter and year-to-date period ended June 30, 2004,compared to the same periods in 2003, reflected a significant increase in netinterest income due, in part, to the November 2003 acquisition of IBC in MiddleTennessee, which added seven branch offices, as well as growth in other keymarkets, most notably in Blount County and Knoxville, Tennessee.  Becauseof this growth and the associated increase in interest-earning assets, alongwith improving asset quality, the Company experienced a substantial rise in netincome and earnings per share for the quarter versus the same period last year.

 

The Company’s non-interest income also increased for the three and sixmonths ended June 30, 2004, as compared to the comparable periods in 2003,however, the stabilization and subsequent rising mortgage interest rateenvironment during the quarter ended June 30, 2004 negatively impacted theCompany’s gains on sales of loans, as well as commissions and fees in theCompany’s mortgage division as the Company’s mortgage originations slowed.

 

 

**Critical Accounting Policies and Estimates**

 

The Company’s consolidated financial statements and accompanying noteshave been prepared in accordance with accounting principles generally acceptedin the United States of America.  Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during the reportedperiods.

 

Management continually evaluates the Company’s accounting policies andestimates it uses to 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 from those estimates made by management.

 

The Companybelieves its critical accounting policies and estimates include the valuationof the allowance for loan losses and the fair value of financial instrumentsand other accounts.  Based onmanagement’s calculation, an allowance of $14,905, or 1.50%, of total loans wasan adequate estimate of losses within the loan portfolio as of June 30,2004.  This estimate resulted in aprovision for loan losses on the income statement of $1,162 and $2,685,respectively, for the three and six months ended June 30, 2004.  If the mix and amount of future charge-offpercentages differ significantly from those assumptions used by management inmaking its determination, the allowance for loan losses and provision for loanlosses on the income statement could be materially affected.

 

The consolidated financial statements includecertain accounting and disclosures that require management to make estimatesabout fair values. Estimates of fair value are used in the accounting forsecurities available for sale, loans held for sale, goodwill, other intangibleassets, and acquisition purchase accounting adjustments.  Estimates of fair values are used indisclosures regarding securities held to maturity, stock compensation,commitments, and the fair values of financial instruments. Fair values areestimated using relevant market information and other assumptions such asinterest rates, credit risk, prepayments and other factors.  The fair values of financial instruments aresubject to change as influenced by market conditions.

 

13

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**Liquidityand Capital Resources**

 

                **Liquidity.**** **Liquidity refers tothe ability or the financial flexibility to manage future cash flows to meetthe needs of depositors and borrowers and fund operations. Maintainingappropriate levels of liquidity allows the Company to have sufficient fundsavailable for reserve requirements, customer demand for loans, withdrawal ofdeposit balances and maturities of deposits and other liabilities. The Company’sliquid assets include investment securities, federal funds sold and otherinterest-earning deposits, and cash and due from banks. Including securitiespledged to collateralize municipal deposits, theseassets represented 7.52% of the total liquidity base at June 30, 2004, ascompared to 9.03% at December 31, 2003. The liquidity base is generally definedto include deposits, repurchase agreements, notes payable and subordinateddebentures.  In addition, the Companymaintains borrowing availability with the Federal Home Loan Bank of Cincinnati(“FHLB”) approximating $42,608 at June 30, 2004. The Company also maintainsfederal funds lines of credit totaling $98,900 at eight correspondent banks ofwhich $98,900 was available at June 30, 2004. The Company believes it hassufficient liquidity to satisfy its current operating needs.

 

For the six months ended June 30, 2004, operating activities of theCompany provided $13,895 of cash flows. Net income of $6,127 comprised asubstantial portion of the cash generated from operations.  Cash flows from operating activities werealso positively affected by various non-cash items, including (i) $2,685 inprovision for loan losses, (ii) $1,499 of depreciation and amortization, (iii)$2,154 in net changes in other assets and (iv) $743 in net changes in accruedinterest payable and other liabilities. The cash flows provided by the proceeds from sales of mortgage loanswere essentially equal to the cash flows used by the originations of mortgageloans held for sale.

 

The Company’snet increase in loans originated, net of principal collected, used $36,213 incash flows and was the primary component of the $30,719 in net cash used ininvesting activities. Offsetting, in part, this use of cash flows were the netchanges in securities and other interest-earning investments and inimprovements to other real estate and proceeds from sales of other real estateowned, net, in the amounts of $6,226 and $1,746, respectively.

 

The net increase in notes payable provided $33,632 in cash flows andwas the primary component in net cash generated from financing activities inthe amount of $9,928, as the Company elected to increase its short-termborrowings from the FHLB to offset the $23,101 decrease in deposits. Inaddition, dividends paid in the amount of $1,837 further reduced the total netcash provided from financing activities.

 

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

 

Shareholders’equity on June 30, 2004 was $105,509, an increase of $3,574, or 3.51%, from$101,935 on December 31, 2003. The increase in shareholders’ equity primarilyreflected net income for the six months ended June 30, 2004 of $6,127 ($0.79per share, assuming dilution). This increase was offset by quarterly dividendpayments during the six months ended June 30, 2004 totaling $1,837 ($0.24 pershare).

 

OnSeptember 18, 2002 the Company announced that its Board of Directors hadauthorized the repurchase of up to $2,000 of the Company’s outstanding shares ofcommon stock beginning in October 2002, and the repurchase plan was renewed bythe Board of Directors in September 2003. On June 4, 2004 the Company announcedthat its Board of Directors had approved an increase in the amount authorizedto be repurchased from $2,000 to $5,000. The repurchase plan is dependent uponmarket conditions and there is no guarantee as to the exact number of shares tobe repurchased by the Company.  To date,the Company has purchased 25,700 shares at an aggregate cost of approximately$538 under this program, which is currently set to expire on October 1, 2004unless renewed by the Board of Directors.

 

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.

 

14

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Risk-based capitalregulations adopted by the Board of Governors of the Federal Reserve Board (the“FRB”) and the Federal Deposit Insurance Corporation (the “FDIC”) require bankholding companies and banks, respectively, to achieve and maintain specifiedratios of capital to risk-weighted assets. The risk-based capital rules aredesigned to measure Tier 1 Capital and Total Capital in relation to the creditrisk of both on- and off-balance sheet items. Under the guidelines, one of four risk weights is applied to thedifferent on-balance sheet items.  Off-balancesheet items, such as loan commitments, are also subject to risk-weighting afterconversion to balance sheet equivalent amounts. All bank holding companies andbanks must maintain a minimum total capital to total risk-weighted assets ratioof 8.00%, at least half of which must be in the form of core, or Tier 1,capital (consisting of shareholders’ equity, less goodwill and other intangibleassets and accumulated other comprehensive income). At June 30, 2004, theCompany and the Bank each satisfied their respective minimum regulatory capitalrequirements, and the Bank was “well-capitalized” within the meaning of federalregulatory requirements.  The capitalratios of the Bank contained within the table below do not differ materiallyfrom those of the Company.  

 

**CAPITAL RATIOS AT JUNE 30, 2004**

 

| ** **                | ** ** | **Required  Minimum  Ratio** | ** ** | **Bank** | ** ** |
|---------------------------|------------|------------------------------|------------|----------|------------|
| Tier 1 risk-based capital |       | 4.00                         | %          | 9.92     | %          |
| Total risk-based capital  |       | 8.00                         | %          | 11.18    | %          |
| Leverage Ratio            |       | 4.00                         | %          | 8.73     | %          |

 

On September 25, 2003, the Company issued $10,310 of subordinated debentures, as part of a privately placed pool of trust preferred securities.  The securities, due in 2033, bear interest at a floating rate of 2.85% above the three-month LIBOR rate, reset quarterly, and are callable in five years without penalty.  The Company used the proceeds of the offering to support its acquisition of IBC, and the capital raised from the offering qualifies as Tier I capital for regulatory purposes.

 

On May 6, 2004, the FRB issued proposed rules which would continue toinclude trust preferred securities in the Tier 1 capital of bank holdingcompanies, subject to stricter quantitative limits and qualitativestandards.  The proposed rules alsoconsidered the impact of Financial Accounting Standards Board (“FASB”)Interpretation No. 46 (“FIN 46”) and its revision (“FIN 46R”), and the relatedaccounting treatment for trust preferred securities, on the inclusion of trustpreferred securities as Tier 1 capital.

 

  The Company has reviewed theseproposed rules and believes that they will have no negative effect on thecapital treatment of the Company’s existing trust preferred securities. Inaddition, management believes that these proposed rules will not constrain theCompany with respect to the potential issuance of additional trust preferredsecurities in accordance with the Company’s growth plans and attendant regulatorycapital needs.

 

The FDIC, however, has recently indicated to the FRB that it opposesthe continuation of trust preferred securities as Tier 1 regulatory capital.Should the FRB modify its proposed rules to agree with the FDIC’s opposition tothe continuation of trust preferred securities as Tier 1 regulatory capital,there would be a reduction in the Company’s consolidated capital ratios and theCompany may not remain “well capitalized”, with respect to total risk-basedcapital, under FRB guidelines.  However, the Bank would remain “wellcapitalized”, with respect to all capital ratios, as a result of the push downaccounting transaction associated with the IBC acquisition. In addition, undersuch a scenario, the Company’s potential issuance of additional trust preferredsecurities may well be curtailed or eliminated. As a result, it may be necessary for the Company to issue additionalcommon stock in association with any future acquisitions, which, among other things,may be more dilutive to earnings per share than if the capital requirements ofsuch acquisitions were funded through the issuance of additional trustpreferred securities.

 

**Off-Balance Sheet Arrangements**

 

At June 30, 2004, the Company had outstanding unused lines of credit and standby letters of credit totaling $182,715 and unfunded loan commitments outstanding of $21,299.  Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements.  If needed to fund these outstanding commitments, the Company has the ability to liquidate Federal funds sold or securities available-for-sale or, on a short-term basis, to borrow from the FHLB and/or purchase Federal funds from other financial institutions.  At June 30, 2004, the Company had accommodations with upstream correspondent banks for unsecured Federal funds lines.  These accommodations

 

15

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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, 2004, which by their terms have contractual maturity dates subsequent to June 30, 2004:

** **
| ** **                                 | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than 5  Years** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|---------------|------------|---------------|------------|------------------------|------------|-----------|------------|
| Commitments to make loans – fixed     |       | $                     | 5,837      |          | $          | —        |       | $                      | —     |      | $          | — |   | $ | 5,837 |   |
| Commitments to make loans – variable. |       | 15,462                |       | —        |       | —        |       | —                 |       | 15,462    |       |
| Unused lines of credit                     |       | 108,409               |       | 20,698        |       | 1,881         |       | 32,347                 |       | 163,335   |       |
| Letters of credit                          |       | 6,233                 |       | 10,347        |       | 2,000         |       | 800                    |       | 19,380    |       |
| Total                                      |       | $                     | 135,941    |          | $          | 31,045        |       | $                      | 3,881      |      | $          | 33,147 |   | $ | 204,014 |   |

 

 

**Disclosure of Contractual Obligations**

 

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 and equipment.  The following table summarizes the Company’ssignificant fixed and determinable contractual obligations as of June 30, 2004:

 
| ** **                         | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than 5  Years** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-----------------------|------------|---------------|------------|---------------|------------|------------------------|------------|-----------|------------|
| Deposits without a stated maturity |       | $                     | 432,021    |          | $          | —        |       | $                      | —     |      | $          | — |   | $ | 432,021 |   |
| Certificate of deposits            |       | 384,399               |       | 61,815        |       | 5,520         |       | 259                    |       | 451,993   |       |
| Repurchase agreements              |       | 14,532                |       | —        |       | —        |       | —                 |       | 14,532    |       |
| FHLB advances and notes payable    |       | 41,169                |       | 2,166         |       | 5,355         |       | 47,972                 |       | 96,662    |       |
| Subordinated debentures            |       | —                |       | —        |       | —        |       | 10,310                 |       | 10,310    |       |
| Operating lease obligations        |       | 445                   |       | 602           |       | 298           |       | 246                    |       | 1,591     |       |
| Deferred compensation              |       | —                |       | —        |       | —        |       | 1,050                  |       | 1,050     |       |
| Purchase obligations               |       | 157                   |       | —        |       | —        |       | —                 |       | 157       |       |
| Total                              |       | $                     | 872,723    |          | $          | 64,583        |       | $                      | 11,173     |      | $          | 59,837 |   | $ | 1,008,316 |   |

 

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

 

**Changesin Results of Operations**

 

**Net income.**** **Net income for thethree months ended June 30, 2004 was $3,275, as compared to $2,301 for the sameperiod in 2003. This increase of $974, or 42.33%, resulted primarily from a$1,930, or 19.20%, increase in net interest income resulting principally fromincreased volume of interest-earning assets as a result primarily of theCompany’s acquisition of IBC and growth in the Blount County and Knoxville,Tennessee markets.  In addition, theCompany’s provision for loan losses decreased $567, or 32.79%, from $1,729 forthe three months ended June 30, 2003 to $1,162 for the same period in 2004,reflecting lower net charge-offs throughout the Company in the quarter endedJune 30, 2004 compared to the same period in 2003.  Offsetting these increases, in part, was an$882, or 11.47%, increase in total non-interest expense from $7,692 for thethree months ended June 30, 2003 to $8,574 for the same period of 2004,reflecting increases in all categories primarily as a result of the IBCacquisition.

 

Net income for the six months ended June30, 2004 was $6,127, as compared to $4,919 for the same period in 2003.  The increase of $1,208, or 24.56%, reflectssubstantially the same trends that existed during the quarter ended June 30,2004.

 

**Net Interest Income.**  The largest source of earnings for theCompany is net interest income, which is the difference between interest incomeon interest-earning assets and interest paid on deposits and otherinterest-bearing liabilities. The primary factors which affect net interestincome are changes in volume and yields of interest-earning assets andinterest-bearing liabilities, which are affected in part by management’sresponses to changes in interest rates through asset/liability management.During the three months ended June 30, 2004, net interest income was

 

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$11,983, ascompared to $10,053 for the same period in 2003, representing an increase of19.20%. While the Company’s average balances ofinterest-earning assets increased more than the average balances ofinterest-bearing liabilities in the three months ended June 30, 2004, ascompared to the same quarter in 2003, thus enhancing net interest income, suchincrease was offset, in part, by the reduction in yield on theseinterest-earning assets which exceeded the decrease in cost on interest-bearingliabilities.  Nevertheless, the Companyexperienced a substantial increase in net interest income, as noted above, inthe three months ended June 30, 2004 as compared to the same quarter in 2003.While the Company’s net interest margin decreased in the three months endedJune 30, 2004 as compared to the same period in 2003 (from 4.92% to 4.69%), theCompany’s net interest margin for the three months ended June 30, 2004 wasessentially unchanged from the quarter ended March 31, 2004 indicating that theCompany’s net interest margin may have stabilized.  The Company believes its net interest marginwill resume compression if interest rates decline; however, if interest ratescontinue to rise, based on the Company’s asset-sensitive interest rate riskposition and its current mix of interest-earning assets and interest-bearingliabilities, the Company believes its net interest margin will begin toincrease.

 

For the sixmonths ended June 30, 2004, net interest income increased by $4,005, or 20.17%,to $23,863 from $19,858 for the same period in 2003, and the same trends outlinedabove with respect to the three months ended June 30, 2004 were observed.

 

**Provision for Loan Losses.**** **During the three andsix months ended June 30, 2004, loan charge-offs were $1,658 and $3,238,respectively, and recoveries of charged-off loans were $481 and $894,respectively. The Company’s provision for loan losses decreased by $567, or32.79%, and $170, or 5.95%, to $1,162 and $2,685 for the three and six monthsended June 30, 2004, respectively, as compared to $1,729 and $2,855 for thesame periods in 2003. The Company’s allowance for loan losses increased by $341to $14,905 at June 30, 2004 from $14,564 at December 31, 2003, with the ratioof the allowance for loan losses to total loans remaining essentially constantfrom period to period.  As of June 30,2004, indicators of credit quality, as discussed below, are mixed compared toDecember 31, 2003 but generally improved compared to June 30, 2003. The ratioof allowance for loan losses to nonperforming assets was 158.23%, 166.35% and123.97% at June 30, 2004, December 31, 2003 and June 30, 2003, respectively,and the ratio of nonperforming assets to total assets was 0.84%, 0.79% and1.10% at June 30, 2004, December 31, 2003 and June 30, 2003, respectively. Theratio of nonperforming loans to total loans, excluding loans held for sale, was0.59%, 0.47% and 0.59% at June 30, 2004, December 31, 2003 and June 30, 2003,respectively.  Within the Bank, theCompany’s largest subsidiary, the ratio of nonperforming assets to total assetswas 0.74%, 0.68% and 0.95% at June 30, 2004, December 31, 2003 and June 30,2003, respectively.  The slight increasein the ratio of nonperforming loans to total loans at June 30, 2004, comparedto December 31, 2003, was primarily due to one commercial loan secured by realestate in the amount of approximately $722.

 

The Company’s annualized net charge-offs for the six months ended June30, 2004 were $4,688 compared to actual net charge-offs of $5,137 for the yearended December 31, 2003.  Annualized net charge-offs as a percentage of averageloans improved from 0.79% for the six months ended June 30, 2003 to 0.48% forthe six months ended June 30, 2004.  Netcharge-offs as a percentage of average loans were 0.64% for the year ended December31, 2003.  Within the Bank,annualized net charge-offs as a percentage of average loans fell from 0.44% forthe six months ended June 30, 2003 to 0.29% for the same period in 2004. Netcharge-offs within the Bank, as a percentage of average loans, were 0.33% forthe year ended December 31, 2003.  Annualized net charge-offs in SuperiorFinancial for the six months ended June 30, 2004 were $626 compared to actualnet charge-offs of $1,070 for the year ended December 31, 2003. Annualized netcharge-offs in the Bank for the six months ended June 30, 2004 were $2,858compared to actual net charge-offs of $2,652 for the year ended December 31,2003. Annualized net charge-offs in GCB Acceptance for the six months endedJune 30, 2004 were $1,204 compared to actual net charge-offs of $1,415 for the yearended December 31, 2003. At this point, management believes that totalcharge-offs for 2004 in Superior Financial and GBC Acceptance will slightlyimprove compared to 2003 charge-offs****based on animproving economy and asset quality 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, 2004.  Managementanticipates that the provision for loan losses during the third quarter of 2004will be consistent with the second quarter of 2004 and also anticipates thatthe provision for loan losses for the entire year of 2004 may be less than theprovision for 2003 if indicators of credit quality continue to stabilize.  However, the provision for loan losses couldincrease for the entire year of 2004, as compared to 2003, if the Company’sloan growth continues at the rate experienced through the six months ended June30, 2004.

 

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**Non-InterestIncome.**** **Income thatis not related to interest-earning assets, consisting primarily of servicecharges, commissions and fees, has become an important supplement to theCompany’s traditional method of earning income through interest rate spreads.

 

Total non-interest income for the three and six months ended June 30,2004 was $3,070 and $6,164, respectively, as compared to $2,897 and $5,621,respectively, for the same periods in 2003. Service charges, commissions andfees remain the largest component of total non-interest income and increasedfrom $2,436 and $4,531 for the three and six months, respectively, ended June30, 2003 to $2,518 and $4,913, respectively for the same periods in 2004. Thisincrease primarily reflects additional fees from deposit-related productsoffset, in part, by a decline in gains on sales of loans, as well ascommissions and fees, in the Company’s mortgage division.

 

**Non-InterestExpense.** Control of non-interest expense also is an important aspect in enhancingincome. Non-interest expense includes personnel, occupancy, and other expensessuch as data processing, printing and supplies, legal and professional fees,postage, Federal Deposit Insurance Corporation assessment, etc. Totalnon-interest expense was $8,574 and $17,525 for the three and six months endedJune 30, 2004 compared to $7,692 and $14,924 for the same periods in 2003. The$882, or 11.47%, increase in total non-interestexpense for the three months ended June 30, 2004 compared to the same period of2003 principally reflects increases in all categories primarily as a result ofthe IBC acquisition.

 

Similarly, the $2,601, or 17.43%, increase in total non-interestexpense for the six months ended June 30, 2004 compared to the same period in2003 reflects substantially the same trends that existed during the quarterended June 30, 2004.

 

Personnel costs are theprimary element of the Company’s non-interest expenses. For the three and sixmonths ended June 30, 2004, salaries and benefits represented $4,464, or52.06%, and $9,171, or 52.33%, respectively, of total non-interest expense.This was an increase of $580, or 14.93%, and $1,082, or 13.38%, respectively,from the $3,884 and $8,089 for the three and six months ended June 30,2003.  The Company had 49 branches atJune 30, 2004 and 50 at December 31, 2003, as compared to 43 at June 30, 2003,and the number of full-time equivalent employees increased 19.27% from 384 atJune 30, 2003 to 458 at June 30, 2004. These increases in personnel costs, number of branches and employees areprimarily the result of the IBC acquisition.

 

Despite this increase in overall non-interest expense, the company’sefficiency ratio was essentially unchanged, at 58.36% at June 30, 2004 comparedto 58.57% at June 30, 2003, as the Company increased its net interest income ata higher rate than its non-interest expense. The efficiency ratio illustrates how much it cost the Company togenerate revenue; for example, it cost the Company 58.36 cents to generate onedollar of revenue for the six months ended June 30, 2004.

 

**IncomeTaxes.**** **The effective income tax rate forthe three and six months ended June 30, 2004 was 38.41% and 37.59%,respectively, compared to 34.80% and 36.12% for the same period in 2003. Thelower effective rates in 2003 result from the Company’s analysis of its taxaccruals and attendant adjustments during the three months ended June 30, 2003.

 

**Changesin Financial Condition**

 

Total assetsat June 30, 2004 were $1,125,002, an increase of $16,480, or 1.49%, from totalassets of $1,108,522 at December 31, 2003. The increase in assets was primarilyreflective of the $32,316, or 3.45%, increase, as reflected on the CondensedConsolidated Balance Sheets, in net loans, excluding loans held for sale, andwas funded by a combination of sources. Declines in cash, cash equivalents andinvestment securities (excluding FHLB, Bankers Bank and other stock) totaled$13,684, as the Company elected to channel additional liquidity intohigher-yielding loans. In addition, while deposits declined by $23,101, as theCompany elected to reduce its higher-costing deposit liabilities,the $33,632 increase in notes payable more than offset the deposit decrease andprimarily represented additional short-term borrowings from the FHLB.Management believes that both of these changes in liability funding sourceswill enhance the Company’s net interest margin and are appropriate based on theCompany’s asset-sensitive position with respect to interest rate risk.

 

At June 30, 2004, loans,net of unearned income and allowance for loan losses, were $969,977 compared to$937,661 at December 31, 2003, an increase of $32,316, or 3.45%, from December31, 2003. The increase in loans during the first six months of 2004 primarilyreflects an increase in commercial real estate loans, residential real estateloans and commercial loans. Non-performing loans include non-accrual loans andloans 90 or more days past

 

18

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due. All loansthat are 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. The Companyhas aggressive collection practices in which senior management is heavilyinvolved. Nonaccrual loans and loans pastdue 90 days and still accruing increased by $1,331, or 29.39%, during the sixmonths ended June 30, 2004 to $5,860. The increase is mainly attributable tothe one commercial loan secured by real estate relationship, discussed in theearlier section entitled “Provision for Loan Losses”.  At June 30, 2004, the ratio of theCompany’s allowance for loan losses to non-performing assets (which includenon-accrual loans) was 158.23%.

 

The Company maintains aninvestment portfolio to provide liquidity and earnings. Investments at June 30,2004 with an amortized cost of $32,257 had a market value of $32,143. Atyear-end 2003, investments with an amortized cost of $38,531 had a market valueof $39,045. This decrease consists primarily of the excess of called andmatured short-term agency and municipal securities over the reinvestedproceeds.

** **

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

 

Acomprehensive qualitative and quantitative analysis regarding market risk wasdisclosed in the Company’s December 31, 2003 Form 10-K.  No material changes in the assumptions usedor results obtained from the model have occurred since December 31, 2003.

 

Actual results for the year ending December31, 2004 will differ from simulated results due to timing, magnitude, andfrequency of interest rate changes, as well as changes in market conditions andmanagement strategies.

 

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

 

**Evaluation of Disclosure Controls and Procedures**

 

The Company maintains disclosure controls and procedures, as defined inRule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the“Exchange Act”), that are designed to ensure that information required to bedisclosed by it in the reports that it files or submits under the Exchange Actis recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms and that such information is accumulatedand communicated to the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.  TheCompany carried out an evaluation, under the supervision and with the participationof its management, including its Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of its disclosurecontrols and procedures as of the end of the period covered by this report.  Based on the evaluation of these disclosurecontrols and procedures, the Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures wereeffective.

 

**Changes in Internal Controls**

 

There were no changes in the Company’s internal control over financialreporting during the Company’s fiscal quarter ended June 30, 2004 that havematerially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

 

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

 

The Bank is a party to the lawsuit styled *Jimmy Holland Boyd and Spring City & Co. v. Town of Jonesborough,Tennessee, et al.*Court No.:2:04-CV-71, now pending in the UnitedStates District Court for the Eastern District of Tennessee, GreenevilleDivision.  The plaintiff alleges, amongother claims, that the Bank, along with the other defendants, violated hiscivil rights in connection with the repossession of certain collateral of aBank borrower in default on its loan. The collateral was then in the possession of plaintiff who claims tohave had an agreement with the borrower which entitled plaintiff to thecollateral.  When the Bank attemptedrepossession, plaintiff disputed the Bank’s rights to the collateral and wasthereafter arrested.  The plaintiff seeksfrom the defendants, jointly and severally, compensatory damages of not lessthan $10 million and punitive damages of not less than the greater of $10million or 5% of the net worth of all defendants and the Bank.

 

The Bank continues to believe that the plaintiffs’ claims are withoutmerit as to the Bank and will continue to vigorously defend this lawsuit.  The Company does not believe that thislitigation will have a material adverse effect on the Company’s results ofoperations.

 

The Company and its subsidiaries are also subject to other claims andsuites arising in the ordinary course of business.  In the opinion of management, the ultimateresolution of these pending claims and legal proceedings will not have amaterial adverse effect on the Company’s results of operations.

 

**Item 2.****            Changes inSecurities, Use of Proceeds and Issuer Purchases of Equity Securities**

 

**Issuer Purchases of Equity Securities**
| ** **              | ** ** | ** **                             | ** ** | ** **                         | ** ** | ** **                                                                                  | ** ** | ** **                                                                                        | ** ** |
|-------------------------|------------|----------------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| **Period**              | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid per  Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Maximum  Dollar  Amount of  Shares that  May Yet Be  Purchased  Under the  Plans or  Programs** | ** ** |
| April 1 – 30, 2004 |       | —                                 |       | $                                  | —     |                                                                                        | —     |                                                                                              | $          | 5,000 | (1) |
| May 1 – 31, 2004   |       | 24,800                                 |       | 20.96                              |       | 24,800                                                                                      |       | 4,480                                                                                             | (1)        |
| June 1 – 30, 2004  |       | 900                                    |       | 20.80                              |       | 900                                                                                         |       | 4,462                                                                                             | (1)        |
| **Totals**              |       | 25,700                                 |       | $                                  | 20.86      |                                                                                        | 25,700     |                                                                                              | $          | 4,462 |   |

 

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(1) Theseamounts reflect the increase in the repurchase program from $2,000 to $5,000,effective June 4, 2004.

 

•        On September 18, 2002 the Company announced that itsBoard of Directors had authorized the repurchase of up to $2,000 of theCompany’s outstanding shares of common stock beginning in October 2002, and therepurchase plan was renewed by the Board of Directors in September 2003. OnJune 4, 2004 the Company announced that its Board of Directors had approved anincrease in the amount authorized to be repurchased from $2,000 to $5,000. Thisprogram is currently set to expire on October 1, 2004 unless renewed by theBoard of Directors.  No repurchase planor program expired during the quarter ended June 30, 2004.

 

 

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

 

None.

 

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

 

(a)                                  The Annual Meeting ofShareholders of the Company was held on April 22, 2004.

 

(b)                                 Not Applicable

 

(c)                                  The followingproposals were considered by shareholders at the Annual Meeting:

 

Proposal1 – Election of Directors

The following directors were re-elected:

 
| ** **         | ** ** | **Votes** | ** ** |
|--------------------|------------|-----------|------------|
| ** **         | ** ** | **For**   | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
| Phil M. Bachman    |       | 4,883,829 |       | — |   | 36,487 |   | — |   |
| Terry Leonard      |       | 4,841,616 |       | — |   | 78,700 |   | — |   |
| Ronald E. Mayberry |       | 4,901,477 |       | — |   | 18,839 |   | — |   |
| Kenneth R. Vaught  |       | 4,875,454 |       | — |   | 44,862 |   | — |   |

 

Proposal2 – Adoption of the Greene County Bancshares, Inc. 2004 Long-Term IncentivePlan

 
| **Votes** | ** ** |
|-----------|------------|
| **For**   | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
| 3,666,608 |       | 396,340 |   | 102,133 |   | 755,235 |   |

 

**Item 5.****            Other Information**

 

None.

 

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

 

(a)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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(b)Reports on Form 8-K

 

OnApril 20, 2004, the Company furnished a Current Report on Form 8-K pursuant toItem 7, Item 9 and Item 12 announcing the Company’s financial results for thefirst quarter ended March 31, 2004.

 

On May 25, 2004, the Company filed a Current Report on Form 8-K/A toamend its Form 8-K12G3 filed with the Securities and Exchange Commission onFebruary 20, 1986 to amend and supplement its description of capital stock.

 

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**SIGNATURES**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   |           |   |   | Greene County Bancshares, Inc. |                                              |
|--------|----------------|--------|--------|--------------------------------|---------------------------------------------------|
|   |           |   |   | Registrant                     |                                              |
|   |           |   |   |                           |                                              |   |
|   |           |   |   |                           |                                              |   |
| Date:  | August 6, 2004 |   | By:    | /s/                            | R. Stan Puckett                                   |   |
|   |           |   |   |                           | R. Stan Puckett                                   |   |
|   |           |   |   |                           | Chairman of the Board and Chief Executive Officer |
|   |           |   |   |                           | (Duly authorized representative)                  |   |
|   |           |   |   |                           |                                              |   |
|   |           |   |   |                           |                                              |   |
| Date:  | August 6, 2004 |   |   | /s/                            | William F. Richmond                               |   |
|   |           |   |   |                           | William F. Richmond                               |   |
|   |           |   |   |                           | Senior Vice President, Chief Financial            |   |
|   |           |   |   |                           | Officer (Principal financial and accounting       |
|   |           |   |   |                           | officer) and Assistant Secretary                  |   |
|        |                |        |        |                                |                                                   |  |  |

 

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