**UNITED STATES**

**SECURITIESAND 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, 2003**                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                          |
| **OR**                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                          |
| **o**                                                                                                                                                                                                                                                                                                                                                |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                          |
| **For the transition period from                             to                         ** |

 

Commission file number    **0-14289**

** **

**GREENECOUNTY 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   ý   NO   o

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate: 6,823,315.

 

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**PART1 – FINANCIAL INFORMATION**

** **

# **ITEM1.          FINANCIAL STATEMENTS**

 

The unaudited condensed consolidated financial statements of theRegistrant and its wholly owned subsidiaries are as follows:

 

Condensed Consolidated Balance Sheets – June 30, 2003 and December 31,2002.

 

Condensed Consolidated Statements of Income and Comprehensive Income -For the three and six months ended June 30, 2003 and 2002.

 

Condensed Consolidated Statement of Stockholders’ Equity – For the sixmonths ended June 30, 2003.

 

Condensed Consolidated Statements of Cash Flows - For the six monthsended June 30, 2003 and 2002.

 

Notes to Condensed Consolidated Financial Statements.

 

1

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**GREENECOUNTY BANCSHARES, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(Dollaramounts in thousands, except share and per share data)**

 
|                                                                                            |   | **(Unaudited)  June 30,  2003** |    | **December 31,  2002*** |   |
|-------------------------------------------------------------------------------------------------|--------|---------------------------------|---------|-------------------------|--------|
| **ASSETS**                                                                                      |   |                            |    |                    |   |
| Cash and due from banks                                                                         |   | $                               | 42,035  |                    | $      | 23,466 |   |
| Federal funds sold                                                                              |   | —                          |    | 39,493                  |   |
| Securities available  for sale                                                                  |   | 42,111                          |    | 33,322                  |   |
| Securities held to  maturity (fair value $458 and $455)                                         |   | 448                             |    | 448                     |   |
| FHLB, Bankers Bank and  other stock, at cost                                                    |   | 5,446                           |    | 4,744                   |   |
| Loans held for sale                                                                             |   | 5,172                           |    | 6,646                   |   |
| Loans                                                                                           |   | 772,848                         |    | 750,257                 |   |
| Less: Allowance for  loan losses                                                                |   | (12,411                         | )       | (12,586                 | )      |
| Net loans                                                                                       |   | 760,437                         |    | 737,671                 |   |
| Premises and equipment,  net                                                                    |   | 27,096                          |    | 26,377                  |   |
| Other assets                                                                                    |   | 26,356                          |    | 27,229                  |   |
|                                                                                            |   |                            |    |                    |   |
| Total assets                                                                                    |   | $                               | 909,101 |                    | $      | 899,396 |   |
|                                                                                            |   |                            |    |                    |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                  |   |                            |    |                    |   |
| Liabilities                                                                                     |   |                            |    |                    |   |
| Deposits                                                                                        |   | $                               | 704,909 |                    | $      | 719,323 |   |
| Federal funds purchased  and repurchase agreements                                              |   | 26,443                          |    | 10,038                  |   |
| Notes payable                                                                                   |   | 87,076                          |    | 82,359                  |   |
| Accrued interest  payable and other liabilities                                                 |   | 12,682                          |    | 13,081                  |   |
| Total liabilities                                                                               |   | 831,110                         |    | 824,801                 |   |
|                                                                                            |   |                            |    |                    |   |
| Shareholders’ equity                                                                       |   |                            |    |                    |   |
| Common stock: $2 par,  15,000,000 shares authorized, 6,823,315 and 6,820,540 shares outstanding |   | 13,647                          |    | 13,641                  |   |
| Additional paid-in  capital                                                                     |   | 4,901                           |    | 4,870                   |   |
| Retained earnings                                                                               |   | 59,210                          |    | 55,928                  |   |
| Accumulated other  comprehensive income                                                         |   | 233                             |    | 156                     |   |
| Total shareholders’  equity                                                                |   | 77,991                          |    | 74,595                  |   |
|                                                                                            |   |                            |    |                    |   |
| Total liabilities and  shareholders’ equity                                                |   | $                               | 909,101 |                    | $      | 899,396 |   |

 

----

* Condensed from audited 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, 2003 and2002**

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

 

** **
|                                                 |   | **Three  Months Ended  June 30,** |   | **Six  Months Ended  June 30,** |   |
|------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                 |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                 |   | **(Unaudited)**                   |   | **(Unaudited)**                 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Interest income                                      |   |                              |   |                            |   |   |   |   |   |
| Interest and fees on  loans                          |   | $                                 | 13,721 |                            | $      | 14,403 |   | $ | 27,339 |   | $ | 28,693 |   |
| Investment securities                                |   | 318                               |   | 440                             |   | 644 |   | 823 |   |
| Federal funds sold and  interest-earning deposits    |   | 43                                |   | 123                             |   | 99 |   | 372 |   |
|                                                 |   | 14,082                            |   | 14,966                          |   | 28,082 |   | 29,888 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Interest expense                                     |   |                              |   |                            |   |   |   |   |   |
| Deposits                                             |   | 3,276                             |   | 3,790                           |   | 6,754 |   | 8,001 |   |
| Borrowings                                           |   | 753                               |   | 814                             |   | 1,470 |   | 1,711 |   |
|                                                 |   | 4,029                             |   | 4,604                           |   | 8,224 |   | 9,712 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Net interest income                                  |   | 10,053                            |   | 10,362                          |   | 19,858 |   | 20,176 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Provision for loan  losses                           |   | 1,729                             |   | 1,369                           |   | 2,855 |   | 2,676 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Net interest income  after provision for loan losses |   | 8,324                             |   | 8,993                           |   | 17,003 |   | 17,500 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Noninterest income                                   |   |                              |   |                            |   |   |   |   |   |
| Service charges and  fees                            |   | 2,436                             |   | 1,950                           |   | 4,531 |   | 3,868 |   |
| Other                                                |   | 461                               |   | 622                             |   | 1,090 |   | 1,291 |   |
|                                                 |   | 2,897                             |   | 2,572                           |   | 5,621 |   | 5,159 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Noninterest expense                                  |   |                              |   |                            |   |   |   |   |   |
| Salaries and employee  benefits                      |   | 3,884                             |   | 4,312                           |   | 8,089 |   | 8,540 |   |
| Occupancy and furniture  and equipment expense       |   | 1,124                             |   | 1,001                           |   | 2,173 |   | 2,033 |   |
| Other                                                |   | 2,684                             |   | 1,960                           |   | 4,662 |   | 3,735 |   |
|                                                 |   | 7,692                             |   | 7,273                           |   | 14,924 |   | 14,308 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Income before income  taxes                          |   | 3,529                             |   | 4,292                           |   | 7,700 |   | 8,351 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Provision for income  taxes                          |   | 1,228                             |   | 1,625                           |   | 2,781 |   | 3,115 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Net income                                           |   | $                                 | 2,301  |                            | $      | 2,667 |   | $ | 4,919 |   | $ | 5,236 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Comprehensive Income                                 |   | $                                 | 2,299  |                            | $      | 2,833 |   | $ | 4,996 |   | $ | 5,328 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Per share of common  stock:                          |   |                              |   |                            |   |   |   |   |   |
| Basic earnings                                       |   | $                                 | 0.34   |                            | $      | 0.39 |   | $ | 0.72 |   | $ | 0.77 |   |
| Diluted earnings                                     |   | 0.33                              |   | 0.39                            |   | 0.71 |   | 0.77 |   |
| Dividends                                            |   | 0.12                              |   | 0.12                            |   | 0.24 |   | 0.24 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Weighted average shares  outstanding:                |   |                              |   |                            |   |   |   |   |   |
| Basic                                                |   | 6,822,235                         |   | 6,818,890                       |   | 6,821,392 |   | 6,818,890 |   |
| Diluted                                              |   | 6,905,852                         |   | 6,834,909                       |   | 6,905,437 |   | 6,834,909 |   |

 

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, 2003**

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

 
|                                                          |   | **Common  Stock** |       | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Compre-  Hensive  Income** |   | **Total  Share-  Holders’  Equity** |   |
|---------------------------------------------------------------|--------|-------------------|------------|----------------------------------|--------|------------------------|--------|--------------------------------------------------|--------|------------------------------------------|--------|
|                                                          |   | **(Unaudited)**   | ** ** |
|                                                          |   |              |       |                             |   |                   |   |                                             |   |                                     |   |
| **Balance, January 1,  2003**                                 |   | $                 | 13,641     |                             | $      | 4,870                  |   | $                                                | 55,928 |                                     | $      | 156 |   | $ | 74,595 |   |
|                                                          |   |              |       |                             |   |                   |   |                                             |   |                                     |   |
| Issuance of  2,775 shares                                     |   | 6                 |       | 31                               |   | —                 |   | —                                           |   | 37                                       |   |
| Dividends  paid ($.24 per share)                              |   | —            |       | —                           |   | (1,637                 | )      | —                                           |   | (1,637                                   | )      |
| Comprehensive  income:                                        |   |              |       |                             |   |                   |   |                                             |   |                                     |   |
| Net income                                                    |   | —            |       | —                           |   | 4,919                  |   | —                                           |   | 4,919                                    |   |
| Change in  unrealized gains (losses), net of reclassification |   | —            |       | —                           |   | —                 |   | 77                                               |   | 77                                       |   |
| Total  comprehensive income                                   |   |              |       |                             |   |                   |   |                                             |   | 4,996                                    |   |
|                                                          |   |              |       |                             |   |                   |   |                                             |   |                                     |   |
| **Balance, June 30, 2003**                                    |   | $                 | 13,647     |                             | $      | 4,901                  |   | $                                                | 59,210 |                                     | $      | 233 |   | $ | 77,991 |   |

 

See accompanying notes.

 

4

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**GREENE COUNTY BANCSHARES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**For the Six Months Ended June 30, 2003 and2002**

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

 
|                                                                                       |   | **June 30,  2003** |   | **June 30,  2002** |       |
|--------------------------------------------------------------------------------------------|--------|--------------------|--------|--------------------|------------|
|                                                                                       |   | **(Unaudited)**    |   |
|                                                                                       |   |               |   |               |       |
| **Cash flows from operating activities**                                                   |   |               |   |               |       |
| Net income                                                                                 |   | $                  | 4,919  |               | $          | 5,236 |   |
| Adjustments to reconcile net income to net  cash from Operating activities                 |   |               |   |               |       |
| Provision for loan losses                                                                  |   | 2,855              |   | 2,676              |       |
| Depreciation and amortization                                                              |   | 961                |   | 954                |       |
| Security amortization and accretion, net                                                   |   | 81                 |   | (24                | )          |
| FHLB stock dividends                                                                       |   | (92                | )      | (101               | )          |
| Net gain on sale of mortgage loans                                                         |   | (607               | )      | (199               | )          |
| Originations of mortgage loans held for  sale                                              |   | (44,474            | )      | (23,184            | )          |
| Proceeds from sales of mortgage loans                                                      |   | 46,555             |   | 28,222             |       |
| Net (gain) losses on sales of fixed assets                                                 |   | —             |   | (112               | )          |
| Net (gain) loss on OREO and repossessed  assets                                            |   | 185                |   | 75                 |       |
| Net changes:                                                                               |   |               |   |               |       |
| Accrued interest receivable and other  assets                                              |   | 1,052              |   | (85                | )          |
| Accrued interest payable and other  liabilities                                            |   | (400               | )      | (789               | )          |
| Net cash from operating activities                                                         |   | 11,035             |   | 12,669             |       |
|                                                                                       |   |               |   |               |       |
| **Cash flows from investing activities**                                                   |   |               |   |               |       |
| Net change in interest-bearing deposits  with banks                                        |   | —             |   | 1,100              |       |
| Net change in securities and other  interest-earning investments                           |   | (9,355             | )      | (9,639             | )          |
| Increase in cash surrender value of life  insurance                                        |   | (458               | )      | (175               | )          |
| Net increase in loans                                                                      |   | (29,138            | )      | (41,868            | )          |
| Improvements to other real estate and  proceeds from sales of other real estate owned, net |   | 3,483              |   | 2,447              |       |
| Proceeds from sale of fixed assets and  fixed asset additions, net                         |   | (1,599             | )      | (669               | )          |
| Net cash used in investing activities                                                      |   | (37,067            | )      | (48,804            | )          |
|                                                                                       |   |               |   |               |       |
| **Cash flows from financing activities**                                                   |   |               |   |               | ** ** |
| Net change in deposits                                                                     |   | (14,413            | )      | (5,048             | )          |
| Net change in federal funds purchased and  repurchase agreements                           |   | 16,404             |   | 19,591             |       |
| Net change in notes payable                                                                |   | 4,717              |   | (177               | )          |
| Dividends paid                                                                             |   | (1,637             | )      | (1,637             | )          |
| Proceeds from issuance of common stock                                                     |   | 37                 |   | —             |       |
| Net cash from financing activities                                                         |   | 5,108              |   | 12,729             |       |
|                                                                                       |   |               |   |               |       |
| **Net change in cash and cash equivalents**                                                |   | (20,924            | )      | (23,406            | )          |
|                                                                                       |   |               |   |               |       |
| Cash and  cash equivalents, beginning of period                                            |   | 62,959             |   | 48,053             |       |
|                                                                                       |   |               |   |               |       |
| **Cash and cash equivalents, end of period**                                               |   | $                  | 42,035 |               | $          | 24,647 |   |

 

See accompanying notes.

 

5

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**NOTE 1– 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. Accordingly, theydo not include all the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements. In the opinion of management, all adjustments (consistingof normal recurring accruals) considered necessary for a fair presentation havebeen included. Operating results for the three and six months ended June 30,2003 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2003. For further information, refer to theconsolidated financial statements and footnotes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002.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.

 

Thefollowing disclosures show the effect on income and earnings per share had theoptions’ fair value been recorded using an option pricing model.

 
|                        |   | **Three  Months Ended June 30,** |   |
|-----------------------------|--------|----------------------------------|--------|
|                        |   | **2003**                         |   | **2002** |   |
|                        |   | **As  Reported**                 |   | **Proforma** |   | **As  Reported** |   | **Proforma** |   |
|                        |   |                             |   |   |   |   |   |   |   |
| Net income                  |   | $                                | 2,301  |   | $ | 2,273 |   | $ | 2,667 |   | $ | 2,646 |   |
| Basic earnings per  share   |   | $                                | 0.34   |   | $ | 0.33 |   | $ | 0.39 |   | $ | 0.38 |   |
| Diluted earnings per  share |   | $                                | 0.33   |   | $ | 0.32 |   | $ | 0.39 |   | $ | 0.38 |   |

 
|                        |   | **Six Months Ended June 30,** |   |
|-----------------------------|--------|-------------------------------|--------|
|                        |   | **2003**                      |   | **2002** |   |
|                        |   | **As  Reported**              |   | **Proforma** |   | **As  Reported** |   | **Proforma** |   |
|                        |   |                          |   |   |   |   |   |   |   |
| Net income                  |   | $                             | 4,919  |   | $ | 4,862 |   | $ | 5,236 |   | $ | 5,190 |   |
| Basic earnings per  share   |   | $                             | 0.72   |   | $ | 0.71 |   | $ | 0.77 |   | $ | 0.76 |   |
| Diluted earnings per  share |   | $                             | 0.71   |   | $ | 0.70 |   | $ | 0.77 |   | $ | 0.76 |   |

 

6

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#  

# **NOTE3 – ALLOWANCE FOR LOAN LOSSES**

 

Transactionsin the allowance for loan losses for the six months ended June 30, 2003 andtwelve months ended December 31, 2002 were as follows:

 
|                          |   | **June 30,  2003** |   | **December 31,  2002** |   |
|-------------------------------|--------|--------------------|--------|------------------------|--------|
|                          |   |               |   |                   |   |
| Balance at  beginning of year |   | $                  | 12,586 |                   | $      | 11,221 |   |
| Add  (deduct):                |   |               |   |                   |   |
| Charge-offs                   |   | (3,850             | )      | (7,648                 | )      |
| Recoveries                    |   | 820                |   | 1,948                  |   |
| Provisions                    |   | 2,855              |   | 7,065                  |   |
| Ending balance                |   | $                  | 12,411 |                   | $      | 12,586 |   |

 
|                                     |   | **June 30,  2003** |   | **December 31,  2002** | ** ** |
|------------------------------------------|--------|--------------------|--------|------------------------|------------|
|                                     |   |               |   |                   |       |
| Loans past  due 90 days still on accrual |   | $                  | 411    |                   | $          | 307 |   |
| Nonaccrual  loans                        |   | 4,178              |   | 7,475                  |       |
| Total                                    |   | $                  | 4,589  |                   | $          | 7,782 |   |

 

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 sharesoutstanding during the period. Stock options are regarded as potential commonshares. Potential common shares are computed using the treasury stock method.For the three and six months ended June 30, 2003, 70,105 options are excludedfrom the effect of dilutive securities because they are anti-dilutive; 155,935options are similarly excluded from the effect of dilutive securities for thethree and six months ended June 30, 2002.

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, 2003 and 2002:

 
|                                                               |   | **Three  Months Ended June 30,** |   |
|--------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                               |   | **2003**                         |   | **2002** |   |
|                                                               |   | **Income  (Numerator)**          |   | **Shares  (Denominator)** |   | **Income  (Numerator)** |   | **Shares  (Denominator)** |   |
|                                                               |   |                             |   |   |   |   |   |   |   |
| **Basic EPS**                                                      |   |                             |   |   |   |   |   |   |   |
| Income available to  common shareholders                           |   | $                                | 2,301  |   | 6,822,235 |   | $ | 2,667 |   | 6,818,890 |   |
|                                                               |   |                             |   |   |   |   |   |   |   |
| **Effect of dilutive securities**                                  |   |                             |   |   |   |   |   |   |   |
| Stock options  outstanding                                         |   | —                           |   | 83,617 |   | — |   | 16,019 |   |
|                                                               |   |                             |   |   |   |   |   |   |   |
| **Diluted EPS**                                                    |   |                             |   |   |   |   |   |   |   |
| Income available to  common shareholders plus  assumed conversions |   | $                                | 2,301  |   | 6,905,852 |   | $ | 2,667 |   | 6,834,909 |   |

 
|                                                               |   | **Six Months Ended June 30,** |       |
|--------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                               |   | **2003**                      |       | **2002** |   |
|                                                               |   | **Income  (Numerator)**       |       | **Shares  (Denominator)** |   | **Income  (Numerator)** |   | **Shares  (Denominator)** |   |
|                                                               |   |                          | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Basic EPS**                                                      |   |                          |       |   |   |   |   |   |   |
| Income available to  common shareholders                           |   | $                             | 4,919      |   | 6,821,392 |   | $ | 5,236 |   | 6,818,890 |   |
|                                                               |   |                          |       |   |   |   |   |   |   |
| **Effect of dilutive securities**                                  |   |                          |       |   |   |   |   |   |   |
| Stock options  outstanding                                         |   | —                        |       | 84,045 |   | — |   | 16,019 |   |
|                                                               |   |                          |       |   |   |   |   |   |   |
| **Diluted EPS**                                                    |   |                          |       |   |   |   |   |   |   |
| Income available to  common shareholders plus  assumed conversions |   | $                             | 4,919      |   | 6,905,437 |   | $ | 5,236 |   | 6,834,909 |   |

 

8

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#  

# **NOTE5 – SEGMENT INFORMATION**

 

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

** **

Segment performance is evaluated using net interest income andnoninterest income. Income taxes are allocated based on income before incometaxes and indirect expenses (includes management fees) are allocated based ontime spent for each segment. Transactions among segments are made at fairvalue. Information reported internally for performance assessment follows.

 
| **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 |   |

 
| **Three  months ended June 30, 2002** |   | **Bank** | ** ** | **Other** |   | **Total** | ** ** |
|---------------------------------------|--------|----------|------------|-----------|--------|-----------|------------|
|                                  |   |     |       |      |   |      |       |
| Net interest income                   |   | $        | 8,738      |      | $      | 1,624     |       | $ | 10,362 |   |
| Provision for loan  losses            |   | 215      |       | 1,154     |   | 1,369     |       |
| Noninterest income                    |   | 2,230    |       | 342       |   | 2,572     |       |
| Noninterest expense                   |   | 6,097    |       | 1,176     |   | 7,273     |       |
| Income tax expense                    |   | 1,760    |       | (135      | )      | 1,625     |       |
| **Segment profit**                    |   | $        | 2,896      |      | $      | (229      | )          | $ | 2,667 |   |
|                                  |   |     |       |      |   |      |       |
| **Segment assets at June 30, 2002**   |   | $        | 791,287    |      | $      | 37,594    |       | $ | 828,881 |   |

 
| **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 |   |
|                                |   |     |    |      |   |      |       |
| **Segment assets at June 30, 2003** |   | $        | 873,846 |      | $      | 35,255    |       | $ | 909,101 |   |

 
| **Six months  ended June 30, 2002** |   | **Bank** |    | **Other** |   | **Total** | ** ** |
|-------------------------------------|--------|----------|---------|-----------|--------|-----------|------------|
|                                |   |     |    |      |   |      |       |
| Net interest income                 |   | $        | 16,862  |      | $      | 3,314     |       | $ | 20,176 |   |
| Provision for loan  losses          |   | 633      |    | 2,043     |   | 2,676     |       |
| Noninterest income                  |   | 4,435    |    | 724       |   | 5,159     |       |
| Noninterest expense                 |   | 12,046   |    | 2,262     |   | 14,308    |       |
| Income tax expense                  |   | 3,275    |    | (160      | )      | 3,115     |       |
| **Segment profit**                  |   | $        | 5,343   |      | $      | (107      | )          | $ | 5,236 |   |
|                                |   |     |    |      |   |      |       |
| **Segment assets at June 30, 2002** |   | $        | 791,287 |      | $      | 37,594    |       | $ | 828,881 |   |

 

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#  

# **ITEM2.**                          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

 

**Forward-Looking Statements**

 

**This Quarterly Reporton Form 10-Q, including all documents incorporated herein by reference,contains forward-looking statements. Additional written or oral forward-lookingstatements may be made by the Company from time to time in filings with theSecurities and Exchange Commission or otherwise. The words “believe”, “expect”,“seek”, and “intend” and similar expressions identify forward-lookingstatements, which speak only as of the date the statement is made. Such forward-lookingstatements are within the meaning of that term in Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. Such statements may include, but are not limited to,projections of income or loss, expenditures, acquisitions, plans for futureoperations, financing needs or plans relating to services of the Company, aswell as assumptions relating to the foregoing. Forward-looking statements areinherently subject to risks and uncertainties, some of which cannot bepredicted or quantified. Future events and actual results could differmaterially from those set forth in, contemplated by or underlying theforward-looking statements.**

 

**Presentation of Amounts**

 

**All dollar amountsset forth below, other than per-share amounts and percentages, are in thousandsunless otherwise noted.**

 

**General**

 

Greene CountyBancshares, Inc. (the “Company”) is the bank holding company for Greene CountyBank (“the Bank”), a Tennessee-chartered commercial bank that conducts theprincipal business of the Company. In addition to its commercial bankingoperations, the Bank conducts separate businesses through its threewholly-owned subsidiaries: Superior Financial Services, Inc. (“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 through its main office in Knox County, Tennessee and it also hasrepresentatives located through out the Company’s branch system. At June 30,2003, the Company had assets of $909 million and operated 40 branchesthroughout East Tennessee, a branch in North Carolina, a trust services officein Middle Tennessee and one loan production office in the southwestern part ofVirginia.

 

On June 18, 2003, the Company announced that it had agreed to acquireGallatin, Tennessee-based Independent Bankshares Corporation (“IBC”), in amerger transaction which will create a bank holding company with combinedassets of approximately $1.1 billion. The Company will be the survivingcorporation after the merger is completed. IBC is a bank holding company forFirst Independent Bank, which has four offices in Gallatin and Hendersonville,Tennessee, and Rutherford Bank and Trust, with three offices in Murfreesboroand Smyrna, Tennessee. The Company expects to complete the transaction in thefourth quarter of 2003, subject to the approval of IBC shareholders and bankingregulators and the satisfaction of usual and customary closing conditions.

 

**Growth and Business Strategy**

 

The Company expects that, over theintermediate term, a majority of its growth will result from mergers andacquisitions including acquisitions of both entire financial institutions andselected branches of financial institutions. De novo branching will also 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 its major markets. This policy contemplates theCompany expanding westward and eastward up to and including Nashville,Tennessee and Roanoke, Virginia, respectively, east/southeast up to andincluding the Piedmont area of North Carolina and western North Carolina,southward to northern Georgia and northward into eastern and central Kentucky.In particular, the Company believes the markets in and around Knoxville andNashville, Tennessee are

 

10

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highlydesirable areas with respect to expansion and growth plans and the Company hassubmitted regulatory applications for the establishment of a full-servicebranch in Knoxville.

 

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.

 

**Liquidity and Capital Resources**

 

**Liquidity. **Liquidity refers tothe ability or the financial flexibility to manage future cash flows to meetthe needs of depositors and borrowers and fund operations. Maintaining appropriatelevels of liquidity allows the Company to have sufficient funds available forreserve requirements, customer demand for loans, withdrawal of deposit balancesand maturities of deposits and other liabilities. The Company’s liquid assetsinclude investment securities, federal funds sold, loans held for sale, andcash and due from banks. Including securities pledged to collateralizemunicipal deposits, these assets represented 11.6% of the total liquidity baseat June 30, 2003, as compared to 13.3% at December 31, 2002. The liquidity baseis generally defined to include deposits, securities sold under repurchaseagreements and short-term borrowed funds and other borrowings. In addition, theCompany maintains borrowing availability with the Federal Home Loan Bank ofCincinnati (“FHLB”) approximating $2,600 at June 30, 2003. The Company alsomaintains federal funds lines of credit totaling $78,900 at seven correspondentbanks of which $61,400 was available at June 30, 2003. The Company believes ithas sufficient liquidity to satisfy its current operating needs.

 

For the six months endedJune 30, 2003, operating activities of the Company provided $11,035 of cashflows. Net income of $4,919 adjusted for non-cash operating activities,including $2,081 in net proceeds from loans originated for sale, $2,855 inprovision for loan losses and depreciation and amortization, including premiumamortization on securities, net of accretion of $1,042, comprised the majorityof the cash generated from operations. These increases in cash flows wereoffset, in part, by the net gain on sale of mortgage loans in the amount of$607.

 

The Company’s netincrease in held-to-maturity loans originated, net of principal collected, used$29,138 in cash flows and was the primary component of the $37,067 in net cashused in investing activities. In addition, the net change in securities andother interest-earning investments used $9,355 in cash flows. Offsetting, inpart, this use of cash flows was the net change in improvements to other realestate and proceeds from sales of other real estate owned, net, in the amountof $3,483.

 

The net increase infederal funds purchased and repurchase agreements and notes payable provided$16,404 and $4,717 in cash flows, respectively. Offsetting, in part, theseincreases in cash flows were the $14,413 reduction in deposits and quarterlydividends paid in the amount of $1,637.

 

**CapitalResources. **TheCompany’s capital position is reflected in its shareholders’ equity, subject tocertain adjustments for regulatory purposes. Shareholders’ equity, or capital,is a measure 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, 2003 was $77,991, an increase of $3,396, or 4.55%, from$74,595 on December 31, 2002. The increase in shareholders’ equity primarilyreflected net income for the six months ended June 30, 2003 of $4,919 ($0.71per share, assuming dilution). This increase was offset by quarterly dividendpayments during the six months ended June 30, 2003 totaling $1,637 ($0.24 pershare).

 

The Company’s primarysource of liquidity is dividends paid by the Bank.  Applicable Tennessee statutes and regulations impose restrictionson the amount of dividends that may be declared by the Bank. Further, anydividend payments are subject to the continuing ability of the Bank to maintainits compliance with minimum federal regulatory capital requirements and toretain its characterization under federal regulations as a “well-capitalized”institution.

 

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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 require bank holdingcompanies and banks, respectively, to achieve and maintain specified ratios ofcapital to risk-weighted assets. The risk-based capital rules are designed tomeasure Tier 1 Capital and Total Capital in relation to the credit risk of bothon- and off-balance sheet items.  Underthe guidelines, one of four risk weights is applied to the different on-balancesheet items.  Off-balance sheet items,such as loan commitments, are also subject to risk-weighting after conversionto balance sheet equivalent amounts. All bank holding companies and banks mustmaintain a minimum total capital to total risk-weighted assets ratio of 8.00%,at least half of which must be in the form of core, or Tier 1, capital(consisting of shareholders’ equity, less goodwill). At June 30, 2003, theCompany and the Bank each satisfied their respective minimum regulatory capitalrequirements, and the Bank was “well-capitalized” within the meaning of federalregulatory requirements. The capital ratios of the Bank contained within thetable below do not differ materially from those of the Company.

 

**CAPITALRATIOS AT JUNE 30, 2003**

 

|                      |   | **Required  Minimum  Ratio** |   | **Bank** |   |
|---------------------------|--------|------------------------------|--------|----------|--------|
| Tier 1 risk-based capital |   | 4.00                         | %      | 9.93     | %      |
| Total risk-based capital  |   | 8.00                         | %      | 11.18    | %      |
| Leverage Ratio            |   | 4.00                         | %      | 8.62     | %      |

 

**Changes in Results of Operations**

 

**Net income. **Net incomefor the three months ended June 30, 2003 was $2,301, as compared to $2,667 forthe same period in 2002. This decrease of $366, or 13.7%, resulted primarilyfrom lower net interest income, increased provisions for loan losses andadditional non-interest expense as compared to the same period in 2002. TheCompany’s net interest income declined $309, or 3.0%, to $10,053 for the threemonths ended June 30, 2003 from $10,362 for the same period in 2002, primarilyreflecting the Company’s lower net interest margin during the second quarter of2003 as compared to the same period in 2002. The Company’s provision for loanlosses increased $360, or 26.3%, to $1,729 for the three months ended June 30,2003 from $1,369 for the same period in 2002. This increase primarily reflectshigher provisions and net chargeoffs in the Bank in the quarter ended June 30,2003 compared to the same period in 2002. Total non-interest expense increased$419, or 5.8%, to $7,692 for the three months ended June 30, 2003 from $7,273for the same period in 2002, resulting primarily from a $724, or 36.9%,increase in other expense to $2,684 for the three months ended June 30, 2003from $1,960 for the same period in 2002. This increase in other expenseresulted from a combination of several factors, including charges associatedwith credit and debit cards, losses on sales of other real estate owned andother repossessed assets, various expenses associated with other real estateowned, additional charitable contributions and increased telephone and dataline expense. Offsetting these decreases, in part, was a $325, or 12.6%,increase in total non-interest income, resulting primarily from additionalgains on sales of loans generated by the Company’s mortgage division, as wellas additional fees associated with various deposit products.

 

Net income for the six months ended June30, 2003 was $4,919, as compared to $5,236 for the same period in 2002. Thisdecrease of $317, or 6.1%, reflects substantially the same trends that existedduring the quarter ended June 30, 2003.

 

**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, 2003, net interest income was $10,053,as compared to $10,362 for the same period in 2002, representing a decrease of3.0%. While the Company’s average balances of interest-earning assets increasedmore than the average balances of interest-bearing liabilities in the threemonths ended June 30, 2003, as compared to the same quarter in 2002, thuspotentially enhancing net interest income, such potential increase was morethan offset by the reduction in yield on these interest-earning assets whichexceeded the decrease in cost on interest-bearing liabilities. As a result, theCompany’s net interest margin decreased in the three months ended June 30, 2003as compared to the same period in 2002. Further, while the Company’s netinterest margin increased slightly for the three months ended June 30, 2003 ascompared to the three months ended March 31, 2003, the Company feels its netinterest margin will continue to

 

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compress in the near term dueto (a) the 25 basis point decrease in the federal funds target by the FederalOpen Market Committee (“FOMC”) in late June, 2003, and (b) the Company’s beliefthat, based on its asset-sensitive interest rate risk position, it will beunable to manage deposit rates down sufficiently in the near term to compensatefor the decline in yields on interest-earning assets. In addition, the Companybelieves its net interest margin will compress further if short-term interestrates continue to decline; however, if short-term interest rates begin to rise,based on the Company’s asset-sensitive interest rate risk position and itscurrent mix of interest-earning assets and interest-bearing liabilities, theCompany believes its net interest margin will begin to increase. However,assuming (a) stable short-term interest rates, (b) no significant change in theyield curve, (c) moderate annualized loan growth of roughly five to sixpercent, and (d) continued growth in low cost and total deposits, the Companyforesees stability in its net interest margin.

 

For the six months ended June 30, 2003, net interest income declined by$318, or 1.6%, to $19,858 from $20,176 for the same period in 2002, and thesame trends outlined above with respect to the three months ended June 30, 2003were observed.

 

**Provision for LoanLosses.**During the three and six months ended June 30,2003, loan charge-offs were $2,305 and $3,850, respectively, and recoveries ofcharged-off loans were $395 and $820, respectively.  The Company’s provision for loan losses increased by $360, or26.3%, and $179, or 6.7%, to $1,729 and $2,855 for the three and six monthsended June 30, 2003, respectively, as compared to $1,369 and $2,676 for thesame periods in 2002. The Company’s allowance for loan losses decreased by $175to $12,411 at June 30, 2003 from $12,586 at December 31, 2002, with the ratioof the allowance for loan losses to total loans declining slightly from 1.65%at December 31, 2002 to 1.58% at June 30, 2003. As of June 30, 2003, mostindicators of credit quality, as discussed below, have improved somewhatcompared to December 31, 2002. The ratio of allowance for loan losses to nonperformingassets was 123.97% and 94.24% at June 30, 2003 and December 31, 2002,respectively, and the ratio of nonperforming assets to total assets was 1.10%and 1.48% at June 30, 2003 and December 31, 2002, respectively. The ratio ofnonperforming loans to total loans, excluding loans held for sale, was .59% and1.02% at June 30, 2003 and December 31, 2002, respectively. The improvement incredit quality indicators is primarily related to the resolution of one largecommercial relationship, in the approximate amount of $860, previouslyclassified as non-accrual.

 

While the ratiosreferenced above have improved at June 30, 2003 compared to December 31, 2002,the Company’s annualized net charge-offs for the six months ended June 30, 2003did increase to $6,060 compared to actual net charge-offs of $5,700 for theyear ended December 31, 2002. Annualized net charge-offs in Superior Financialfor the six months ended June 30, 2003 were $1,148 compared to actual netcharge-offs of $1,606 for the year ended December 31, 2002. Annualized netcharge-offs in the Bank for the six months ended June 30, 2003 were $3,386compared to actual net charge-offs of $2,834 for the year ended December 31,2002. Annualized net charge-offs in GCB Acceptance for the six months ended June30, 2003 were $1,528 compared to actual net charge-offs of $1,260 for the yearended December 31, 2002. At this point, management believes that the Company’stotal charge-offs for 2003 will be comparable to 2002 charge-offs.

 

Based on the Company’sallowance for loan loss calculation, andmore specifically, the collateral values underlying nonperforming assets,management believes the allowance for loan losses is adequate at June 30,2003.  However, management anticipatesthat the provision for loan losses during the third quarter of 2003 will belower than the second quarter of 2003 but also anticipates that the provisionfor loan losses for the entire year of 2003 may exceed the provision for 2002if indicators of credit quality do not improve.  In addition, management believes normal loan growth may well leadto an increase in the provision for loan losses if economic conditions remainuncertain.

** **

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

 

Total non-interestincome for the three and six months ended June 30, 2003 was $2,897 and $5,621,respectively, as compared to $2,572 and $5,159, respectively, for the sameperiods in 2002. Service charges, commissions and fees remain the largestcomponent of total non-interest income and increased from $1,950 and $3,868 forthe three and six months, respectively, ended June 30, 2002 to $2,436 and$4,531, respectively, for the same periods in 2003. These increases mainlyreflect additional gains on sales of loans generated by the Company’s mortgagedivision, as well as additional volume and fee increases associated with theCompany’s retail service charge program. Offsetting these increases, in part,were declines in other non-interest income in both the three and six-monthperiods ended June 30, 2003 compared to the same periods in 2002. Othernon-interest income decreased

 

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from$622 and $1,291 for the three and six months, respectively, ended June 30, 2002to $461 and $1,090, respectively, for the same periods in 2003. This decreaseis primarily related to lower income generated by the Company’s annuity programas a result of a significantly lower interest rate environment and theattendant decrease in rates offered on such products.

** **

**Non-Interest Expense.**  Control of non-interest expense also is animportant aspect in enhancing income. Non-interest expense includes personnel,occupancy, and other expenses such as data processing, printing and supplies,legal and professional fees, postage, Federal Deposit Insurance Corporationassessment, etc. Total non-interest expense was $7,692 and $14,924 for thethree and six months ended June 31, 2003 compared to $7,273 and $14,308 for thesame periods in 2002.  The $419, or5.8%, increase in total non-interest expense for the three months ended June30, 2003 compared to the same period of 2002 resulted principally from a $724,or 36.9%, increase in other expense from $1,960 for the three months ended June30, 2002 to $2,684 for the same period of 2003. This increase in other expenseresulted from a combination of several factors, including charges associatedwith credit and debit cards, losses on sales of other real estate owned andother repossessed assets, various expenses associated with other real estateowned, additional charitable contributions and increased telephone and dataline expense.

 

Similarly, the $616, or4.3%, increase in total non-interest expense for the six months ended June 30,2003 compared to the same period in 2002 resulted principally from a $927, or24.8%, increase in other expense from $14,308 for the six months ended June 30,2002 to $14,924 for the same period of 2003. This increase reflectssubstantially the same trends that existed during the quarter ended June 30,2003.

 

Personnel costs continueto represent the primary element of the Company’s non-interest expenses. Forthe three and six months ended June 30, 2003, salaries and benefits represented$3,884, or 50.5%, and $8,089, or 54.2%, respectively, of total non-interestexpense. The Company had 43 branches at June 30, 2003, as compared to 42 at December31, 2002 and 41 at June 30, 2002, and had 384 full-time equivalent employees atJune 30, 2002 and June 30, 2003. 

 

Primarily as a result ofthis overall increase in non-interest expense, the Company’s efficiency ratiowas negatively affected, as the ratio increased from 56.48% at June 30, 2002 to58.57% at June 30, 2003. The efficiency ratio illustrates how much it cost theCompany to generate revenue; for example, it cost the Company 58.57 cents togenerate one dollar of revenue for the six months ended June 30, 2003.

** **

**Changes in Financial Condition**

 

Totalassets at June 30, 2003 were $909,101, an increase of $9,705, or 1.1%, fromtotal assets of $899,396 at December 31, 2002. The increase in assets wasprimarily reflective of the $22,766, or 3.1%, increase, as reflected on theCondensed Consolidated Balance Sheets, in net loans, excluding loans held forsale, and the $8,789, or 26.4%, increase in securities available for sale.These increases were mainly funded by the $20,924 decrease in cash and cashequivalents, as the Company elected to channel some of its cash and cashequivalents into higher-yielding investments and loans during the six monthsended June 30, 2003. The Company’s deposits declined by $14,414, or 2.0%, fromDecember 31, 2002 levels, as management elected to reduce some of the Company’shigher costing liabilities, and the deposit runoff was replaced mainly by the$16,405 increase in federal funds purchased and repurchase agreements.

 

AtJune 30, 2003, loans, net of unearned income and allowance for loan losses,were $760,437 compared to $737,671 at December 31, 2002, an increase of$22,766, or 3.1%, from December 31, 2002. The increase in loans during thefirst six months of 2003 primarily reflects an increase in commercial real estateand residential real estate loans. Non-performing loans include non-accrual loans and loans 90 or more dayspast due. All loans that are 90 or more days past due are considerednon-accrual unless they are adequately secured and there is reasonable assuranceof full collection of principal and interest. Non-accrual loans that are 120days past due without assurance of repayment are charged off against theallowance for loan losses. The Company has aggressive collection practices inwhich senior management is heavily involved. Nonaccrual loans and loans past due 90 days and still accruing decreasedby $3,193, or 41.0%, during the six months ended June 30, 2003 to $4,589. Thedecrease is mainly attributable to the resolution of the commercialrelationship discussed in Changes in Results of Operations — “Provision forLoans Losses”. At June 30, 2003, the ratio of the Company’s allowancefor loan losses to non-performing assets (which include non-accrual loans) was123.97%.

 

The Company maintains aninvestment portfolio to provide liquidity and earnings. Investments at June 30,2003 with an amortized cost of $42,183 had a market value of $42,569. Atyear-end 2002, investments with an

 

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amortizedcost of $33,519 had a market value of $33,777. This increase reflectsmanagement’s decision to purchase additional short-term U.S. governmentsecurities toward the latter part of the quarter ended June 30, 2003 in orderto slightly increase the yield on interest-earning assets.

** **

**Effect of New AccountingStandards**

 

The Financial Accounting Standards Board“FASB” recently issued two new accounting standards, Statement 149, Amendmentof Statement 133 on Derivative Instruments and Hedging Activities, andStatement 150, Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equities, both of which generallybecome effective in the quarter beginning July 1, 2003.  Management determined that, upon adoptingthe new standards, they will not materially affect the Company’s operatingresults or financial condition.

** **

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

 

A comprehensivequalitative and quantitative analysis regarding market risk was disclosed inthe Company’s December 31, 2002 Form 10-K. No material changes in the assumptions used or results obtained from themodel have occurred since December 31, 2002.

Actual results for the year ending December31, 2003 will differ from simulated results due to timing, magnitude, and frequencyof interest rate changes, as well as changes in market conditions andmanagement strategies.

 

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

 

A review and evaluationwas performed by the Company’s principal executive and financial officersregarding the effectiveness of the Company’s disclosure controls and proceduresas of June 30, 2003, pursuant to Rule 13a-15(b) of the Securities Act of1934.  Based on that review andevaluation, the principal executive and financial officers have concluded thatthe Company’s current disclosure controls and procedures, as designed andimplemented, are effective.

 

During the quarter endedJune 30, 2003, the Company made changes in its internal control over financialreporting related to credit card processing that are reasonably likely toenhance the Company’s internal control over financial reporting.  These changes include re-locating the creditcard processing function to the Company’s main operations center, enhancingsegregation of duties, implementing additional training for employees andincreasing management oversight and review. These changes were in effect at June 30, 2003.

 

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**PARTII - OTHER INFORMATION**

 

**Item 1.            Legal Proceedings**

 

The Company and its subsidiaries are involved in various claims andlegal actions arising in the ordinary course of business. Management currentlyis not aware of any material legal proceedings to which the Company or any ofits subsidiaries is a party or to which any of their property is subject.

 

 

**Item2.            Changes in Securities andUse of Proceeds**

 

None.

 

 

**Item 3.            Defaults upon Senior Securities**

 

None.

 

 

**Item 4.            Submission of Matters to a Voteof Security Holders**

 

(a)                                  TheAnnual Meeting of Shareholders of the Company was held on April 23, 2003.

 

(b)                                 NotApplicable

 

(c)                                  Thefollowing proposal was considered by shareholders at the Annual Meeting:

 

Proposal1 – Election of Directors

The following directors were re-elected:

 
|                      |   | **Votes** |   |
|---------------------------|--------|-----------|--------|
|                      |   | **For**   |   | **Withheld** |   | **Abstain** |   | **Broker  Non-Votes** |   |
| Charles S. Brooks         |   | 3,836,981 |   | — |   | 118,993 |   | — |   |
| W.T. Daniels              |   | 3,934,014 |   | — |   | 21,960 |   | — |   |
| Davis Stroud              |   | 3,932,394 |   | — |   | 23,580 |   | — |   |
| Charles H. Whitfield, Jr. |   | 3,934,764 |   | — |   | 21,210 |   | — |   |
| Kenneth R. Vaught         |   | 3,945,924 |   | — |   | 10,050 |   | — |   |

 

 

**Item5.            Other Information**

 

None.

 

 

**Item 6.            Exhibits and Reports on Form 8-K**

 

(a)Exhibits

 

Exhibit No.2.1                                            Agreementand Plan of Merger by and between the Company and Independent BanksharesCorporation dated as of June 17, 2003, with exhibits. The schedules to theAgreement, which are listed in the Agreement, are omitted.  The Company agrees to supplementally furnishto the Commission a copy of any such schedule upon request.

 

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Exhibit No. 2.2                                            ExpenseAgreement dated as of June 17, 2003 by and between the Company and IndependentBankshares Corporation

 

Exhibit No. 31.1                                      Certificationof Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002

 

Exhibit No. 31.2                                      Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002

 

Exhibit No. 32.1                                      ChiefExecutive Officer Certification Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit No. 32.2                                      ChiefFinancial Officer Certification Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

(b)Reports on Form 8-K

 

TheCompany filed a Form 8-K on April 16, 2003 announcingfinancial results for the quarter ended March 31, 2003.

 

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**SIGNATURES**

 

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

 

 
|                 |   |   | Greene County Bancshares, Inc. |   |
|----------------------|--------|--------|--------------------------------|--------|
|                 |   |   | Registrant                     |   |
|                 |   |   |                           |   |   |
| Date: August 6, 2003 |   |   | By:                            | /s/    | R. Stan Puckett |   |
|                 |   |   |                           |   | R. Stan Puckett |
|                 |   |   |                           |   | Chairman of the Board and Chief Executive Officer |
|                 |   |   |                           |   | (Duly authorized representative) |
|                 |   |   |                           |   |   |
| Date: August 6, 2003 |   |   |                           | /s/    | William F. Richmond |   |
|                 |   |   |                           |   | William F. Richmond |
|                 |   |   |                           |   | Senior Vice President and Chief Financial |
|                 |   |   |                           |   | Officer (Principal financial and accounting  officer) |
|                      |        |        |                                |        |  |  |  |

 

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