** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                       |       |                                                                                                    |
| **For the quarterly period ended September 30,  2005**                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                       |       |                                                                                                    |
| **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 its charter)

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

 

**Not Applicable**

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

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  YES  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 by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act.)  YES  o  NO  ý

 

As of November 2, 2005, the number of sharesoutstanding of the issuer’s common stock was: 9,760,906

 

 

----

 

**PART 1 – FINANCIAL INFORMATION**

 

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

 

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

 
| Condensed Consolidated  Balance Sheets – September 30, 2005 and December 31, 2004.                                              |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                           |   |
| Condensed  Consolidated Statements of Income and Comprehensive Income - For the three  and nine months ended September 30, 2005 and 2004. |   |
|                                                                                                                                           |   |
| Condensed Consolidated  Statement of Shareholders’ Equity – For the nine months ended September 30,  2005.                      |   |
|                                                                                                                                           |   |
| Condensed Consolidated  Statements of Cash Flows - For the nine months ended September 30, 2005  and 2004.                                |   |
|                                                                                                                                           |   |
| Notes to Condensed  Consolidated Financial Statements.                                                                                         |   |

 

1

----

 

**GREENE COUNTY BANCSHARES, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**September 30, 2005 and December 31, 2004**

**(Amounts in thousands, exceptshare and per share data)**

** **
| ** **                                                                                      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004*** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)**              | ** ** | ** **                   | ** ** |
| **ASSETS**                                                                                      |       |                         |       |                         |       |
| Cash and due from banks                                                                         |       | $                            | 35,464     |                         | $          | 30,727 |   |
| Federal funds sold                                                                              |       | 10,857                       |       | 39,921                       |       |
| Securities available  for sale                                                                  |       | 53,778                       |       | 35,318                       |       |
| Securities held to  maturity (with a market value of $3,394 and $4,506)                         |       | 3,380                        |       | 4,381                        |       |
| FHLB, Bankers Bank and  other stock, at cost                                                    |       | 6,407                        |       | 6,211                        |       |
| Loans held for sale                                                                             |       | 4,260                        |       | 1,151                        |       |
| Loans                                                                                           |       | 1,215,072                    |       | 1,046,867                    |       |
| Less: Allowance for  loan losses                                                                |       | (17,640                      | )          | (15,721                      | )          |
| Net loans                                                                                       |       | 1,197,432                    |       | 1,031,146                    |       |
| Premises and equipment,  net                                                                    |       | 36,311                       |       | 35,591                       |       |
| Goodwill and other  intangible assets                                                           |       | 23,131                       |       | 23,695                       |       |
| Other assets                                                                                    |       | 34,560                       |       | 25,262                       |       |
| Total assets                                                                                    |       | $                            | 1,405,580  |                         | $          | 1,233,403 |   |
|                                                                                            |       |                         |       |                         |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                  | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Liabilities                                                                                     |       |                         |       |                         |       |
| Deposits                                                                                        |       | $                            | 1,134,864  |                         | $          | 998,022 |   |
| Repurchase agreements                                                                           |       | 11,393                       |       | 13,868                       |       |
| FHLB advances and notes  payable                                                                |       | 70,240                       |       | 85,222                       |       |
| Subordinated debentures                                                                         |       | 13,403                       |       | 10,310                       |       |
| Accrued interest  payable and other liabilities                                                 |       | 15,373                       |       | 17,263                       |       |
| Total liabilities                                                                               |       | 1,245,273                    |       | 1,124,685                    |       |
|                                                                                            |       |                         |       |                         |       |
| Shareholders’ equity                                                                       |       |                         |       |                         |       |
| Common stock: $2 par,  15,000,000 shares authorized, 9,485,949 and 7,647,740 shares outstanding |       | 18,972                       |       | 15,296                       |       |
| Additional paid-in  capital                                                                     |       | 64,634                       |       | 24,160                       |       |
| Retained earnings                                                                               |       | 76,860                       |       | 69,289                       |       |
| Accumulated other  comprehensive loss                                                           |       | (159                         | )          | (27                          | )          |
| Total shareholders’  equity                                                                |       | 160,307                      |       | 108,718                      |       |
|                                                                                            |       |                         |       |                         |       |
| Total liabilities and  shareholders’ equity                                                |       | $                            | 1,405,580  |                         | $          | 1,233,403 |   |

 

----

* Derived fromaudited consolidated financial statements.

 

See accompanying notes.

 

2

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**GREENE COUNTY BANCSHARES, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME AND COMPREHENSIVE INCOME**

**Three and Nine Months Ended September 30, 2005and 2004**

**(Amounts in thousands, except share and per sharedata)**

 
| ** **                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(Unaudited)**                            | ** ** | **(Unaudited)**                           | ** ** |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Interest income                                      |       |                                       |       |                                      |       |   |   |   |   |
| Interest and fees on  loans                          |       | $                                          | 21,335     |                                      | $          | 15,796 |   | $ | 59,265 |   | $ | 46,843 |   |
| Investment securities                                |       | 626                                        |       | 344                                       |       | 1,691 |   | 1,069 |   |
| Federal funds sold and  interest-earning deposits    |       | 154                                        |       | 2                                         |       | 597 |   | 29 |   |
|                                                 |       | 22,115                                     |       | 16,142                                    |       | 61,553 |   | 47,941 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Interest expense                                     |       |                                       |       |                                      |       |   |   |   |   |
| Deposits                                             |       | 6,285                                      |       | 2,665                                     |       | 16,048 |   | 8,857 |   |
| Borrowings                                           |       | 1,282                                      |       | 1,065                                     |       | 3,558 |   | 2,809 |   |
|                                                 |       | 7,567                                      |       | 3,730                                     |       | 19,606 |   | 11,666 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Net interest income                                  |       | 14,548                                     |       | 12,412                                    |       | 41,947 |   | 36,275 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Provision for loan  losses                           |       | 1,704                                      |       | 1,062                                     |       | 4,386 |   | 3,747 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Net interest income  after provision for loan losses |       | 12,844                                     |       | 11,350                                    |       | 37,561 |   | 32,528 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Noninterest income                                   |       |                                       |       |                                      |       |   |   |   |   |
| Service charges and  fees                            |       | 3,159                                      |       | 2,436                                     |       | 8,137 |   | 7,349 |   |
| Other                                                |       | 637                                        |       | 584                                       |       | 2,298 |   | 1,835 |   |
|                                                 |       | 3,796                                      |       | 3,020                                     |       | 10,435 |   | 9,184 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Noninterest expense                                  |       |                                       |       |                                      |       |   |   |   |   |
| Salaries and employee  benefits                      |       | 5,366                                      |       | 4,800                                     |       | 15,710 |   | 13,971 |   |
| Occupancy and furniture  and equipment expense       |       | 1,821                                      |       | 1,494                                     |       | 5,334 |   | 4,445 |   |
| Other                                                |       | 3,504                                      |       | 2,917                                     |       | 10,344 |   | 8,320 |   |
|                                                 |       | 10,691                                     |       | 9,211                                     |       | 31,388 |   | 26,736 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Income before income  taxes                          |       | 5,949                                      |       | 5,159                                     |       | 16,608 |   | 14,976 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Provision for income  taxes                          |       | 2,273                                      |       | 1,946                                     |       | 6,283 |   | 5,636 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Net income                                           |       | $                                          | 3,676      |                                      | $          | 3,213 |   | $ | 10,325 |   | $ | 9,340 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Comprehensive income                                 |       | $                                          | 3,639      |                                      | $          | 3,418 |   | $ | 10,193 |   | $ | 9,226 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Per share of common  stock:                          |       |                                       |       |                                      |       |   |   |   |   |
| Basic earnings                                       |       | $                                          | 0.48       |                                      | $          | 0.42 |   | $ | 1.35 |   | $ | 1.22 |   |
| Diluted earnings                                     |       | $                                          | 0.47       |                                      | $          | 0.42 |   | $ | 1.33 |   | $ | 1.21 |   |
| Dividends                                            |       | $                                          | 0.12       |                                      | $          | 0.12 |   | $ | 0.36 |   | $ | 0.36 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average shares  outstanding:                |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                |       | 7,710,871                                  |       | 7,644,544                                 |       | 7,670,502 |   | 7,657,078 |   |
| Diluted                                              |       | 7,805,458                                  |       | 7,710,335                                 |       | 7,765,343 |   | 7,724,756 |   |

 

See accompanying notes.

 

3

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**GREENE COUNTY BANCSHARES, INC.**

**CONDENSED CONSOLIDATED STATEMENT OFCHANGES IN SHAREHOLDERS’ EQUITY**

**For the Nine Months Ended September 30, 2005**

**(Amounts in thousands, except share and per sharedata)**

 
| ** **                                         | ** ** | ** **      | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated** | ** ** | ** **        | ** ** |
|----------------------------------------------------|------------|-----------------|------------|----------------|------------|--------------|------------|-----------------|------------|-------------------|------------|
| ** **                                         | ** ** | ** **      | ** ** | ** **     | ** ** | ** **   | ** ** | **Other**       | ** ** | **Total**         | ** ** |
| ** **                                         | ** ** | ** **      | ** ** | **Additional** | ** ** | ** **   | ** ** | **Compre-**     | ** ** | **Share-**        | ** ** |
| ** **                                         | ** ** | **Common**      | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **hensive**     | ** ** | **holders’** | ** ** |
| ** **                                         | ** ** | **Stock**       | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Loss**        | ** ** | **Equity**        | ** ** |
| ** **                                         | ** ** | **(Unaudited)** | ** ** |
|                                               |       |            |       |           |       |         |       |            |       |              |       |
| **Balance,  January 1, 2005**                 |       | $               | 15,296     |           | $          | 24,160       |       | $               | 69,289     |              | $          | (27 | ) | $ | 108,718 |   |
|                                               |       |            |       |           |       |         |       |            |       |              |       |
| Issuance of 5,166  shares under stock option plan  |       | 10              |       | 67             |       | —       |       | —          |       | 77                |       |
| Dividends paid ($.36  per share)                   |       | —          |       | —         |       | (2,754       | )          | —          |       | (2,754            | )          |
| Issuance of 1,833,043  shares in public offering   |       | 3,666           |       | 40,407         |       | —       |       | —          |       | 44,073            |       |
| Comprehensive income:                              |       |            |       |           |       |         |       |            |       |              |       |
| Net income                                         |       | —          |       | —         |       | 10,325       |       | —          |       | 10,325            |       |
| Change in unrealized  gains (losses), net of taxes |       | —          |       | —         |       | —       |       | (132            | )          | (132              | )          |
| Total comprehensive  income                        |       |            |       |           |       |         |       |            |       | 10,193            |       |
|                                               |       |            |       |           |       |         |       |            |       |              |       |
| **Balance,  September 30, 2005**              |       | $               | 18,972     |           | $          | 64,634       |       | $               | 76,860     |              | $          | (159 | ) | $ | 160,307 |   |

 

See accompanying notes.

 

4

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**GREENE COUNTY BANCSHARES, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**For the Nine Months Ended September 30, 2005and 2004**

**(Amounts in thousands)**

 
| ** **                                                                          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                          | ** ** | **2005**               | ** ** | **2004**               | ** ** |
| ** **                                                                          | ** ** | **(Unaudited)**        | ** ** |
| **Cash  flows from operating activities**                                           | ** ** | ** **             | ** ** | ** **             | ** ** |
| Net income                                                                          |       | $                      | 10,325     |                   | $          | 9,340 |   |
| Adjustments to  reconcile net income to net cash provided from operating activities |       |                   |       |                   |       |
| Provision for loan  losses                                                          |       | 4,386                  |       | 3,747                  |       |
| Depreciation and  amortization                                                      |       | 2,673                  |       | 2,297                  |       |
| Security amortization  and accretion, net                                           |       | 23                     |       | 83                     |       |
| FHLB stock dividends                                                                |       | (196                   | )          | (162                   | )          |
| Net gain on sale of  mortgage loans                                                 |       | (339                   | )          | (368                   | )          |
| Originations of  mortgage loans held for sale                                       |       | (29,234                | )          | (36,085                | )          |
| Proceeds from sales of  mortgage loans                                              |       | 26,463                 |       | 38,134                 |       |
| Increase in cash  surrender value of life insurance                                 |       | (426                   | )          | (358                   | )          |
| Net losses from sales  of fixed assets                                              |       | 20                     |       | 47                     |       |
| Net loss on OREO and  repossessed assets                                            |       | 66                     |       | 216                    |       |
| Deferred tax (benefit)  expense                                                     |       | (1,227                 | )          | 1,947                  |       |
| Net changes:                                                                        |       |                   |       |                   |       |
| Other assets                                                                        |       | (1,962                 | )          | 252                    |       |
| Accrued interest  payable and other liabilities                                     |       | (1,891                 | )          | (643                   | )          |
| Net cash provided from  operating activities                                        |       | 8,681                  |       | 18,447                 |       |
|                                                                                |       |                   |       |                   |       |
| **Cash  flows from investing activities**                                           | ** ** | ** **             | ** ** | ** **             | ** ** |
| Purchase of securities  available for sale                                          |       | (21,310                | )          | (5,000                 | )          |
| Proceeds from  maturities of securities held for sale                               |       | 2,611                  |       | 10,585                 |       |
| Proceeds from  maturities of securities held to maturity                            |       | 1,003                  |       | 903                    |       |
| Purchase of life  insurance                                                         |       | (3,657                 | )          | (2,500                 | )          |
| Net change in loans                                                                 |       | (174,770               | )          | (36,005                | )          |
| Proceeds from sale of  other real estate                                            |       | 2,088                  |       | 3,150                  |       |
| Improvements to other  real estate                                                  |       | —                 |       | (5                     | )          |
| Proceeds from sale of  fixed assets                                                 |       | 8                      |       | 20                     |       |
| Premises and equipment  expenditures                                                |       | (2,857                 | )          | (2,886                 | )          |
| Net cash used in  investing activities                                              |       | (196,884               | )          | (31,738                | )          |
|                                                                                |       |                   |       |                   |       |
| **Cash  flows from financing activities**                                           | ** ** | ** **             | ** ** | ** **             | ** ** |
| Net change in deposits                                                              |       | 136,842                |       | (29,027                | )          |
| Net change in  repurchase agreements                                                |       | (2,475                 | )          | (2,426                 | )          |
| Proceeds from notes  payable                                                        |       | 214,757                |       | 134,950                |       |
| Proceeds from  subordinated debentures                                              |       | 3,093                  |       | —                 |       |
| Repayments of notes  payable                                                        |       | (229,737               | )          | (97,224                | )          |
| Dividends paid                                                                      |       | (2,754                 | )          | (2,754                 | )          |
| Proceeds from issuance  of common stock                                             |       | 44,150                 |       | 141                    |       |
| Repurchase of common  stock                                                         |       | —                 |       | (538                   | )          |
| Net cash provided from  financing activities                                        |       | 163,876                |       | 3,122                  |       |
| **Net  change in cash and cash equivalents**                                        | ** ** | (24,327                | )          | (10,169                | )          |
| Cash and cash  equivalents, beginning of year                                       |       | 70,648                 |       | 41,341                 |       |
| **Cash  and cash equivalents, end of period**                                       | ** ** | $                      | 46,321     |                   | $          | 31,172 |   |
| **Supplemental  disclosures – cash and noncash**                               | ** ** | ** **             | ** ** | ** **             | ** ** |
| Interest paid                                                                       |       | $                      | 19,507     |                   | $          | 12,585 |   |
| Income taxes paid                                                                   |       | 4,951                  |       | 3,527                  |       |
| Loans converted to  other real estate                                               |       | 4,816                  |       | 3,817                  |       |
| Unrealized loss on  available for sale securities, net of tax                       |       | (132                   | )          | (114                   | )          |

 

See accompanying notes.

 

5

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**GREENE COUNTY BANCSHARES, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**September 30, 2005**

**Unaudited**

**(Amounts in thousands, except share and per sharedata)**

 

**NOTE 1 – PRINCIPLES OF CONSOLIDATION**

 

The accompanyingunaudited condensed consolidated financial statements of Greene CountyBancshares, Inc. (the “Company”) and its wholly owned subsidiary, GreeneCounty Bank (the “Bank”), have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interiminformation and in accordance with the instructions to Form 10-Q and Article 10of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”).Accordingly, they do not include all the information and disclosures requiredby accounting 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 nine monthsended September 30, 2005 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2005. For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2004. Certain amounts from prior period financial statements have beenreclassified to conform to the current year’s presentation.  These reclassifications had no effect on netincome or shareholders’ equity as previously reported.

 

# **NOTE 2 – 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 Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”) to measure expense for optionsusing the Black-Scholes option pricing model to estimate fair value.

 

TheCompany maintains a 2004 Long-Term Incentive Plan, pursuant to which 500,000shares of the Company’s common stock have been reserved for issuance todirectors and employees of the Company and the Bank.  The plan providesfor the issuance of awards in the form of stock options, stock appreciationrights, restricted shares, restricted share units, deferred share units andperformance awards.  Stock options granted under the plan are typicallygranted at exercise prices equal to the fair market value of the Company’scommon stock on the date of grant and typically have terms of ten years andvest at an annual rate of 20%.

 

The followingdisclosures show the effect on income and earnings per share had the options’fair value been recorded using an option pricing model. 

 
| ** **                                                                                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income:                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| As reported                                                                                                          |       | $                                          | 3,676      |                                      | $          | 3,213 |   | $ | 10,325 |   | $ | 9,340 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects         |       | 4                                          |       | (8                                        | )          | 11 |   | 11 |   |
| Deduct: Total  stock-based compensation expense determined under fair value-based method for  all awards, net of tax |       | (40                                        | )          | (30                                       | )          | (170 | ) | (124 | ) |
| Pro forma                                                                                                            |       | $                                          | 3,640      |                                      | $          | 3 ,175 |   | $ | 10,166 |   | $ | 9 ,227 |   |
| Earnings per common  share:                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| As reported                                                                                                          |       | $                                          | 0.48       |                                      | $          | 0.42 |   | $ | 1.35 |   | $ | 1.22 |   |
| Pro forma                                                                                                            |       | $                                          | 0.48       |                                      | $          | 0.42 |   | $ | 1.33 |   | $ | 1.20 |   |
| Diluted earnings per common  share:                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| As reported                                                                                                          |       | $                                          | 0.47       |                                      | $          | 0.42 |   | $ | 1.33 |   | $ | 1.21 |   |
| Pro forma                                                                                                            |       | $                                          | 0.47       |                                      | $          | 0.41 |   | $ | 1.31 |   | $ | 1.19 |   |

 

6

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**NOTE 3 – LOANS (NET)**

# ** **

Loans at September 30, 2005 and December 31, 2004 were asfollows:

 
| ** **                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                            |       |                   |       |                  |       |
| Commercial                      |       | $                      | 224,021    |                  | $          | 165,975 |   |
| Commercial real estate          |       | 612,731                |       | 484,088               |       |
| Residential real estate         |       | 302,693                |       | 319,713               |       |
| Consumer                        |       | 81,747                 |       | 82,532                |       |
| Other                           |       | 3,707                  |       | 4,989                 |       |
|                            |       | 1,224,899              |       | 1,057,297             |       |
|                            |       |                   |       |                  |       |
| Less: Unearned interest  income |       | (9,827                 | )          | (10,430               | )          |
| Allowance for loan  losses      |       | (17,640                | )          | (15,721               | )          |
|                            |       |                   |       |                  |       |
| Net Loans                       |       | $                      | 1,197,432  |                  | $          | 1,031,146 |   |

 

Transactions in the allowance for loan losses and certain informationabout nonaccrual loans and loans 90 days past due but still accruing interestfor the nine months ended September 30, 2005 and twelve months ended December 31,2004 were as follows:

 
| ** **                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                             |       |                   |       |                  |       |
| Balance at beginning of  year    |       | $                      | 15,721     |                  | $          | 14,564 |   |
| Add (deduct):                    |       |                   |       |                  |       |
| Reserve acquired in  acquisition |       | —                 |       | 363                   |       |
| Provision                        |       | 4,386                  |       | 5,836                 |       |
| Loans charged off                |       | (3,806                 | )          | (6,980                | )          |
| Recoveries of loans  charged off |       | 1,339                  |       | 1,938                 |       |
| Ending balance                   |       | $                      | 17,640     |                  | $          | 15,721 |   |

 
| ** **                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                                     |       |                   |       |                  |       |
| Loans past due 90 days  still on accrual |       | $                      | 1,077      |                  | $          | 664 |   |
| Nonaccrual loans                         |       | 6,023                  |       | 6,242                 |       |
| Total                                    |       | $                      | 7,100      |                  | $          | 6,906 |   |

 

7

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**NOTE 4 – EARNINGS PER SHARE OF COMMON STOCK**

 

Basic earnings pershare (EPS) of common stock is computed by dividing net income by the weightedaverage number of common shares outstanding during the period. Diluted earningsper share of common stock is computed by dividing net income by the weightedaverage number of common shares and potential common shares outstanding duringthe period. Stock options are regarded as potential common shares. Potentialcommon shares are computed using the treasury stock method. For the three andnine months ended September 30, 2005, 60,185 options are excluded from theeffect of dilutive securities because they are anti-dilutive; 72,155 optionsare similarly excluded from the effect of dilutive securities for the three andnine months ended September 30, 2004.

 

The following is a reconciliation of the numerators and denominatorsused in the basic and diluted earnings per share computations for the three andnine months ended September 30, 2005 and 2004:

 
| ** **                                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                                        | ** ** | **Income**                                | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                           | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                      |       |   |   |   |   |   |   |
| **Basic  EPS**                                                    |       |                                      |       |   |   |   |   |   |   |
| Income available to  common shareholders                          |       | $                                         | 3,676      |   | 7,710,871 |   | $ | 3,213 |   | 7,644,544 |   |
|                                                              |       |                                      |       |   |   |   |   |   |   |
| **Effect  of dilutive securities**                                |       |                                      |       |   |   |   |   |   |   |
| Stock options  outstanding                                        |       | —                                    |       | 94,587 |   | — |   | 65,791 |   |
|                                                              |       |                                      |       |   |   |   |   |   |   |
| **Diluted  EPS**                                                  |       |                                      |       |   |   |   |   |   |   |
| Income available to  common shareholders plus assumed conversions |       | $                                         | 3,676      |   | 7,805,458 |   | $ | 3,213 |   | 7,710,335 |   |

 
| ** **                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                        | ** ** | **Income**                               | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                          | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                     |       |   |   |   |   |   |   |
| **Basic  EPS**                                                    | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to  common shareholders                          |       | $                                        | 10,325     |   | 7,670,502 |   | $ | 9,340 |   | 7,657,078 |   |
|                                                              |       |                                     |       |   |   |   |   |   |   |
| **Effect  of dilutive securities**                                | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock options  outstanding                                        |       | —                                   |       | 94,841 |   | — |   | 67,678 |   |
|                                                              |       |                                     |       |   |   |   |   |   |   |
| **Diluted  EPS**                                                  | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to  common shareholders plus assumed conversions |       | $                                        | 10,325     |   | 7,765,343 |   | $ | 9,340 |   | 7,724,756 |   |

 

8

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**NOTE 5 – SEGMENT INFORMATION**

 

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

** **

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

 
| **Three months ended September 30,  2004** | ** ** | **Bank** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|-------------------------------------------------|------------|----------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                            |       |     |       |                |       |                 |       |             |       |       |       |
| Net interest income  (expense)                  |       | $        | 11,048     |                | $          | 1,507                |       | $                | (143       | )          | $          | — |   | $ | 12,412 |   |
| Provision for loan  losses                      |       | 838      |       | 224                 |       | —               |       | —           |       | 1,062      |       |
| Noninterest income                              |       | 2,830    |       | 384                 |       | 4                    |       | (198             | )          | 3,020      |       |
| Noninterest expense                             |       | 8,130    |       | 1,131               |       | 148                  |       | (198             | )          | 9,211      |       |
| Income tax expense  (benefit)                   |       | 1,870    |       | 194                 |       | (118                 | )          | —           |       | 1,946      |       |
| **Segment  profit**                             |       | $        | 3,040      |                | $          | 342                  |       | $                | (169       | )          | $          | — |   | $ | 3,213 |   |
| **Segment  assets at September 30, 2004**  |       | $        | 1,087,230  |                | $          | 30,978               |       | $                | 2,020      |       | $          | — |   | $ | 1,120,228 |   |

 
| **Nine months ended September 30,  2005** | ** ** | **Bank** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|------------------------------------------------|------------|----------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                           |       |     |       |                |       |                 |       |             |       |       |       |
| Net interest income  (expense)                 |       | $        | 38,053     |                | $          | 4,434                |       | $                | (540       | )          | $          | — |   | $ | 41,947 |   |
| Provision for loan  losses                     |       | 3,435    |       | 951                 |       | —               |       | —           |       | 4,386      |       |
| Noninterest income                             |       | 9,411    |       | 1,442               |       | 197                  |       | (615             | )          | 10,435     |       |
| Noninterest expense                            |       | 28,299   |       | 3,256               |       | 448                  |       | (615             | )          | 31,388     |       |
| Income tax expense  (benefit)                  |       | 5,983    |       | 655                 |       | (355                 | )          | —           |       | 6,283      |       |
| **Segment  profit**                            |       | $        | 9,747      |                | $          | 1,014                |       | $                | (436       | )          | $          | — |   | $ | 10,325 |   |

 
| **Nine months ended September 30,  2004** | ** ** | **Bank** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|------------------------------------------------|------------|----------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                           |       |     |       |                |       |                 |       |             |       |       |       |
| Net interest income  (expense)                 |       | $        | 31,946     |                | $          | 4,698                |       | $                | (369       | )          | $          | — |   | $ | 36,275 |   |
| Provision for loan  losses                     |       | 2,674    |       | 1,073               |       | —               |       | —           |       | 3,747      |       |
| Noninterest income                             |       | 8,409    |       | 1,175               |       | 178                  |       | (578             | )          | 9,184      |       |
| Noninterest expense                            |       | 23,337   |       | 3,411               |       | 566                  |       | (578             | )          | 26,736     |       |
| Income tax expense  (benefit)                  |       | 5,447    |       | 527                 |       | (338                 | )          | —           |       | 5,636      |       |
| **Segment  profit**                            |       | $        | 8,897      |                | $          | 862                  |       | $                | (419       | )          | $          | — |   | $ | 9,340 |   |

 

9

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**Asset Quality Ratios**

 

 
| ** **                                                                       | ** ** | **Bank**   | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **As of  and for the period ended September 30, 2005**                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Nonperforming loans as  a percentage of total loans net of unearned income       |       | 0.54       | %          | 1.69       | %          | 0.58       | %          |
| Nonperforming assets as  a percentage of total assets                            |       | 0.70       | %          | 1.85       | %          | 0.75       | %          |
| Allowance for loan  losses as a percentage of total loans net of unearned income |       | 1.26       | %          | 7.92       | %          | 1.45       | %          |
| Allowance for loan  losses as a percentage of nonperforming assets               |       | 154.79     | %          | 311.17     | %          | 166.27     | %          |
| Annualized net  charge-offs to average total loans, net of unearned income       |       | 0.17       | %          | 4.21       | %          | 0.29       | %          |

 
| ** **                                                                    | ** ** | **Bank**   | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **As of  and for the period ended September 30, 2004**                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Nonperforming loans as  a percentage of total loans net of unearned income    |       | 0.77       | %          | 2.24       | %          | 0.83       | %          |
| Nonperforming assets as  a percentage of total assets                         |       | 1.01       | %          | 3.18       | %          | 1.10       | %          |
| Allowance for loan  losses as a percentage of total loans net unearned income |       | 1.25       | %          | 8.28       | %          | 1.51       | %          |
| Allowance for loan  losses as a percentage of nonperforming assets            |       | 108.50     | %          | 249.81     | %          | 120.52     | %          |
| Annualized net  charge-offs to average total loans, net of unearned income    |       | 0.30       | %          | 5.31       | %          | 0.47       | %          |

 
| ** **                                                                    | ** ** | **Bank**   | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **As of  and for the year ended December 31, 2004**                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Nonperforming loans as  a percentage of total loans net of unearned income    |       | 0.60       | %          | 2.22       | %          | 0.66       | %          |
| Nonperforming assets as  a percentage of total assets                         |       | 0.61       | %          | 2.90       | %          | 0.69       | %          |
| Allowance for loan  losses as a percentage of total loans net unearned income |       | 1.27       | %          | 7.77       | %          | 1.50       | %          |
| Allowance for loan  losses as a percentage of nonperforming assets            |       | 176.54     | %          | 255.69     | %          | 185.56     | %          |
| Net charge-offs to  average total loans, net of unearned income               |       | 0.35       | %          | 5.04       | %          | 0.51       | %          |

 

10

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**NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS**

 

**Goodwill**

 

Goodwill was nolonger amortized starting in 2002; however, it is periodically evaluated forimpairment and no impairment was recognized during the second quarter of 2005.  Goodwill had a carrying amount of $18,282 at September 30,2005 and December 31, 2004.

 

**Coredeposit and other intangibles**

 

Other intangibleassets consist of core deposit intangibles arising from whole bank and branchacquisitions.  They are initiallymeasured at fair value and then are amortized on a straight-line method overtheir estimated useful lives, which is 10 years.

 

Core depositintangibles had a gross carrying amount of $7,320 for the period ended September 30,2005 and the year ended December 31, 2004 and accumulated amortization of$2,471 and $1,907 for the same periods, respectively.  Aggregate amortization expense for the threeand nine months ended September 30, 2005 was $188 and $564, respectively,as compared to $156 and $462, respectively, for the same periods in 2004.Annual estimated amortization expense for the next five years is:

 
| 2005  |   | $   | 752    |   |
|-------|--------|-----|--------|--------|
| 2006  |   | 642 |   |
| 2007  |   | 642 |   |
| 2008  |   | 642 |   |
| 2009  |   | 642 |   |
| Total |   | $   | 3,320  |   |

 

**NOTE 7 – SUBORDINATED DEBENTURES**

 

On June 28, 2005, the Company formed GreeneCounty Capital Trust II (“GC Trust II”). GC Trust II issued $3,000 of variable rate trust preferred securities aspart of a pooled offering of such securities. The Company issued $3,093 of subordinated debentures to the GC Trust IIin exchange for the proceeds of the offering, which debentures represent thesole asset of GC Trust.  The debenturespay interest quarterly at the three-month LIBOR plus 1.68% adjusted quarterly.  The Company may redeem the subordinateddebentures, in whole or in part, beginning July 2010 at a price of 100% offace value.  The subordinated debenturesmust be redeemed no later than 2035.

 

In September 2003, the Company formed GreeneCounty Capital Trust I (“GC Trust”).  GCTrust issued $10,000 of variable rate trust preferred securities as part of apooled offering of such securities.  TheCompany issued $10,310 of subordinated debentures to the GC Trust in exchangefor the proceeds of the offering, which debentures represent the sole asset ofGC Trust.  The debentures pay interestquarterly at the three-month LIBOR plus 2.85% adjusted quarterly.  The Company may redeem the subordinateddebentures, in whole or in part, beginning October 2008 at a price of 100%of face value.  The subordinateddebentures must be redeemed no later than 2033.

 

In accordance with FASB Interpretation No. 46R,GC Trust and GC Trust II are not consolidated with the Company.  Accordingly, the Company does not report thesecurities issued by GC Trust and GC Trust II as liabilities, and insteadreports as liabilities the subordinated debentures issued by the Company andheld by GC Trust and GC Trust II. However, the Company has fully and unconditionally guaranteed therepayment of the variable rate trust 

 

11

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preferred securities. These trust preferred securities currently qualify as Tier 1 capital forregulatory capital requirements of the Company.

 

**NOTE 8 – REVOLVING CREDIT AGREEMENT**

 

On August 30, 2005, the Company entered into and became obligatedunder a Revolving Credit Agreement (the “Credit Agreement”) by and between theCompany and SunTrust Bank (“SunTrust”) pursuant to which SunTrust has agreed toloan the Company up to $35,000, with such maximum amount available under theCredit Agreement being reduced to $15,000 after November 30, 2005 (the “Loan”).

 

SunTrust’s obligation to make the Loan to the Company terminates on August 29,2006, unless the Loan is extended or earlier terminated, in accordance with theterms of the Credit Agreement. Advances under the Loan will bear interest, atthe Company’s discretion, at a rate of one, two, three or six month LIBOR plus1.75% per annum from August 30, 2005 to November 30, 2005 and at arate of one, two, three or six month LIBOR plus 1.25% per annum from November 30,2005 to the end of the Loan’s term.  TheCompany also must pay SunTrust a commitment fee equal to 0.15% per annum on theaverage daily amount of the Loan that has not been borrowed by the Company.

 

The Loan is secured by SunTrust’s lien and security interest in all ofthe outstanding common stock of the Bank pursuant to the terms of a SecurityAgreement entered into by and between the Company and SunTrust dated as of August 30,2005.  The Credit Agreement containscertain financial covenants that require the Company and the Bank to, amongother things, (i) maintain a ratio of tangible net worth to total tangibleassets of at least 4.5% from August 30, 2005 to November 30, 2005 andof at least 6.5% thereafter; (ii) achieve a return on total average assetsof not less than 0.80% for each fiscal quarter and the previous three fiscalquarters; (iii) keep its ratio of nonperforming assets to total loans andother real estate owned below 1.75%; and (iv) achieve certain capitalratios.

 

**NOTE 9 – SUBSEQUENT EVENT**

 

On October 7, 2005 the Bank completed the purchase of five branchoffices in Clarksville, Tennessee, from Old National Bank, Evansville,Indiana.  In the acquisition, the Bank assumed a total of approximately$173,000 in deposits and acquired approximately $115,000 in loans outstandingand $11,000 in fixed assets, including buildings and equipment.

 

12

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# **ITEM2.**                             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

**Forward-Looking Statements**

 

**This Quarterly Report on Form 10-Q containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  Forward-looking statements, whichare based on assumptions and estimates and describe our future plans,strategies and expectations, are generally identifiable by the use of the words“anticipate,” “will,” “believe,” “may,” “could,” “would,” “should,” “estimate,”“expect,” “intend,” “seek,” or similar expressions.  These forward-looking statements may address,among other things, the Company’s business plans, objectives or goals forfuture operations or expansion, the Company’s forecasted revenues, earnings,assets or other measures of performance, or estimates of risks and future costsand benefits.  Although these statementsreflect the Company’s good faith belief based on current expectations,estimates and projections, they are subject to risks, uncertainties andassumptions and are not guarantees of future performance.  Important factors that could cause actualresults to differ materially from the forward-looking statements we make inthis Quarterly Report on Form 10-Q include, but are not limited to, thefollowing:**

 

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

 

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

 

**•****                                          aninsufficient allowance for loan losses as a result of inaccurate assumptions;**

 

**•****                                          changesin interest rates, yield curves and interest rate spread relationships;**

 

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

 

**•****                                          changesin demand for loan products and financial services;**

 

**•****                                          increasedcompetition or market concentration;**

 

**•****                                          concentrationof credit exposure;**

 

**•**                                          newstate or federal legislation, regulations, or the initiation or outcome oflitigation; and

** **

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

 

**If one or more of these risks or uncertaintiesmaterialize, or if any of the Company’s underlying assumptions prove incorrect,the Company’s actual results, performance or achievements may vary materiallyfrom future results, performance or achievements expressed or implied by theseforward-looking statements.  Allforward-looking statements included in this Quarterly Report on Form 10-Qare expressly qualified in their entirety by the cautionary statements in thissection.  The Company does not intend toand assumes no responsibility for updating or revising any forward-lookingstatements contained in or incorporated by reference into this Quarterly Reporton Form 10-Q, whether as a result of new information, future events orotherwise.**

 

13

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**Presentation of Amounts**

 

**All dollar amounts set forth below, other thanper-share amounts, are in thousands unless otherwise noted.**

 

**General**

 

Greene County Bancshares, Inc. (the “Company”) isthe bank holding company for Greene County Bank (the “Bank”), aTennessee-chartered commercial bank that conducts the principal business of theCompany.  The Company is the secondlargest bank holding company headquartered in Tennessee.  The Bank currently maintains a main office inGreeneville, Tennessee and 42 full-service bank branches primarily in East andMiddle Tennessee.  In addition to itscommercial banking operations, the Bank conducts separate businesses throughits three wholly-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 a trust andmoney management function doing business as Presidents Trust from an office inWilson County, Tennessee.

 

**Growth Strategy**

 

The Company expects that, over the intermediate term,its growth from mergers and acquisitions, including acquisitions of both entirefinancial institutions and selected branches of financial institutions, willcontinue.  De novo branching is alsoexpected to be a method of growth, particularly in high-growth and otherdemographically desirable markets.  Since2003, the Company has focused on bringing its community-focused style ofbanking to Middle Tennessee, including the Nashville metropolitan statisticalarea, and on continuing its growth in the Knoxville metropolitan statisticalarea.

 

On November 21, 2003, the Company entered theMiddle Tennessee market by completing its acquisition of Gallatin,Tennessee-based Independent Bankshares Corporation (“IBC”).  IBC was the bank holding company for FirstIndependent Bank, which had four offices in Gallatin and Hendersonville,Tennessee, and Rutherford Bank and Trust, with three offices in Murfreesboroand Smyrna, Tennessee.  First IndependentBank and Rutherford Bank and Trust were subsequently merged with the Bank, withthe Bank as the surviving entity.

 

On November 15, 2004 the Company establishedbanking operations in Nashville, Tennessee, in Davidson County, with theopening of a full-service branch operating under the name of Middle TennesseeBank & Trust.  This new branch, likeall of the Bank’s bank brands, operates within the Bank’s structure.  This new branch expanded the Company’spresence in the Middle Tennessee market and helped fill in the market betweenSumner and Rutherford Counties.  In 2005,Middle Tennessee Bank & Trust has opened a new branch in WilliamsonCounty, Tennessee and expects to open another new branch in Davidson County,Tennessee in the fourth quarter.

 

The Company opened a new branch in Knoxville,Tennessee in late 2003 and expects to open its second branch in that cityduring the first-half of 2006.

 

On December 10, 2004 the Company purchased threefull-service branches from National Bank of Commerce located in Lawrence CountyTennessee.  This purchase (“NBCtransaction”) adds to the Bank’s presence in Middle Tennessee.

 

On October 7, 2005,the Company purchased five bank branches in Clarksville, Tennessee from OldNational Bank, Evansville, Indiana. (the “Clarksville transaction”)  Inthe acquisition, the Bank assumed a total of approximately $173,000 in depositsand acquired approximately $115,000 in loans outstanding and $11,000 in fixedassets, including buildings and equipment.

 

**Overview**

 

The Company’s results of operations for the thirdquarter and the nine month period ended September 30, 2005, compared tothe same periods in 2004, reflected an increase in interest income dueprimarily to loan growth as a result of the Company’s expansion initiatives,offset, in part, by an increase in interest expense as a result of increaseddeposit levels resulting from its expansion efforts and competitive deposit pricingpressures.

 

14

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The increase in net interest income was also offset,in part, by an increase in noninterest expense which was reflective of theCompany’s expansion efforts into Middle Tennessee and the Company’s branchexpansion in its Knoxville, Tennessee market as well as expenses associatedwith the establishment of the Company’s High Performance Checking Program.  The Company’s provision for loan losses alsoincreased, particularly in the three months ended September 30, 2005 ascompared to the same period in 2004, reflective primarily of the Company’s loangrowth.  Noninterest income alsoincreased for both the three and nine months ended September 30, 2005 ascompared to the comparable periods in 2004 as a result of increased depositservice charges and Non-Sufficient Funds (“NSF”) fees resulting from theCompany’s expansion efforts and recently introduced High Performance CheckingProgram.

 

The Company’s net interest margin for the three andnine months ended September 30, 2005 continued to experience compression,primarily as a result of deposit and other liability pricing pressures that theCompany continued to experience as it aggressively attempted to support itsloan growth.  The Company’s net interestmargin also experienced compression as a result of the Company’s competitivepricing of its loans, particularly inits Middle Tennessee market, and its emphasis on originating moretraditional loans while controlling the growth of its higher-yielding subprimeloans at its non-bank subsidiaries.  TheCompany believes that it will continue to experience compression in its netinterest margin for the remainder of2005 as a result of loan and deposit pricing pressures.

 

At September 30, 2005, the Company had totalconsolidated assets of approximately $1,405,580, total consolidated deposits ofapproximately $1,134,864, total consolidated net loans, net of unearned incomeand allowance for loan losses, of approximately $1,201,692, and totalconsolidated shareholders’ equity of approximately $160,307.  The Company’s annualized return on averageshareholders’ equity for the three and nine months ended September 30,2005, was 12.52% and 12.08%, respectively, and its return on average total assetsfor the same periods was 1.07% and 1.04%, respectively.  The Company expects that its total assets,total consolidated deposits, total consolidated net loans and totalshareholders’ equity will continue to increase over the remainder of 2005 as aresult of its expansion efforts, including its branch expansions in the MiddleTennessee, Knoxville, and also the Clarksville transaction.

 

On September 28, 2005, the Company consummatedthe sale of 1,833,043 shares of its common stock in a public offering in whichit received proceeds, after deducting the underwriting discount and theexpenses of the offering, of approximately $44,100.  The Company contributed approximately $35,000of these net proceeds to the Bank to provide capital for the Clarksvilletransaction.  On October 19, 2005,the underwriters in the public offering exercised their option to coverover-allotments and the Company sold an additional 274,957 shares of its commonstock for net proceeds of approximately $6,700.

 

**Critical Accounting Policies and Estimates**

 

The Company’s consolidated financial statements andaccompanying notes have been prepared in accordance with accounting principlesgenerally accepted in the United States of America.  The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reported periods.

 

Management continually evaluates the Company’saccounting policies and estimates it uses to prepare the consolidated financialstatements.  In general, management’sestimates are based on historical experience, information from regulators andthird party professionals and various assumptions that are believed to bereasonable under the facts and circumstances. Actual results could differ significantly from those estimates made bymanagement.

 

The Company believes itscritical accounting policies and estimates include the valuation of theallowance for loan losses and the fair value of financial instruments and otheraccounts.  Based on management’s calculation,an allowance of $17,640, or 1.45%, of total loans, net of unearned interest,was an adequate estimate of losses within the loan portfolio as of September 30,2005.  This estimate resulted in aprovision for loan losses on the income statement of $1,704 and $4,386, respectively,for the three and nine months ended September 30, 2005.  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.

 

15

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Theconsolidated financial statements include certain accounting and disclosuresthat require management to make estimates about fair values. Estimates of fairvalue are used in the accounting for securities available for sale, loans heldfor sale, goodwill, other intangible assets, and acquisition purchaseaccounting adjustments.  Estimates offair values are used in disclosures regarding securities held to maturity,stock compensation, commitments, and the fair values of financial instruments.Fair values are estimated using relevant market information and otherassumptions such as interest rates, credit risk, prepayments and otherfactors.  The fair values of financial instrumentsare subject to change as influenced by market conditions.

 

**Changes in Results of Operations**

 

**Net income. **Net income for the three months ended September 30,2005 was $3,676 as compared to $3,213 for the same period in 2004. Thisincrease of $463, or 14.41%, resulted primarily from a $2,136, or 17.21%,increase in net interest income reflecting principally increased volume of interest-earningassets arising primarily from the Company’s expansion initiatives and relatedgrowth in the loan portfolio. Offsetting this increase was a $1,480, or 16.07%,increase in total noninterest expense from $9,211 for the three months ended September 30,2004 to $10,691 for the same period of 2005. This increase is also primarilyattributable to the Company’s expansion initiatives, as discussed above.

 

Net income for the ninemonths ended September 30, 2005 was $10,325 as compared to $9,340 for thesame period in 2004.  The increase of $985,or 10.55%, reflects substantially the same trends that existed during thequarter ended September 30, 2005.

 

**Net Interest Income.**  The largest source of earnings for theCompany is net interest income, which is the difference between interest incomeon interest-earning assets and interest paid on deposits and otherinterest-bearing liabilities. The primary factors which affect net interestincome are changes in volume and yields of interest-earning assets andinterest-bearing liabilities, which are affected in part by management’sresponses to changes in interest rates through asset/liability management.During the three months ended September 30, 2005, net interest income was$14,548 as compared to $12,412 for the same period in 2004, representing anincrease of 17.21%. While the Company’s average balances of interest-earningassets increased more than the average balances of interest-bearing liabilitiesin the three months ended September 30, 2005, as compared to the samequarter in 2004, thus enhancing net interest income, such increase was offset,in part, by the smaller increase in yield on these interest-earning assets ascompared to the cost of interest-bearing liabilities. Nevertheless, the Companyexperienced a substantial increase in net interest income, as noted above, inthe three months ended September 30, 2005 as compared to the same quarterin 2004.

 

The Company’s net interest margin decreased to 4.54%for the three months September 30, 2005 as compared to 4.82% for the sameperiod in 2004, and declined three basis points from the 4.57% net interestmargin for the three months ended June 30, 2005.  The Company’s net interest margin alsodeclined for the nine months ended September 30, 2005, falling to 4.58%when compared to 4.73% for the same period in 2004. In order to fund its strongloan growth, the Company has pursued aggressive deposit rates throughout allits markets, resulting in margin compression. In addition, management has beencontrolling the growth of higher-yielding subprime loans in the Bank’ssubsidiaries and focusing on increasing the balances of its traditionalcommercial, commercial real estate and residential real estate loans, thusreducing the percentage of subprime loans in the Company’s portfolio. Thistrend in the loan mix, together with the competitive pricing the Company isexperiencing in its Middle Tennessee and Knoxville area markets, alsoconstrains the increases in loan yields during a rising interest rateenvironment notwithstanding the Company’s asset-sensitive balance sheet. Basedon the Company’s current mix of interest-earning assets and interest-bearingliabilities, the Company believes its net interest margin will continue toexperience compression for the remainder of 2005 and into 2006 as a result ofloan and deposit pricing pressures.

 

For the nine months ended September 30, 2005, netinterest income increased by $5,672, or 15.64%, to $41,947 from $36,275 for thesame period in 2004, and the same trends outlined above with respect to the threemonths ended September 30, 2005 were observed.

 

16

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The following tables set forth certain informationrelating to the Company’s consolidated average interest-earning assets andinterest-bearing liabilities and reflects the average yield on assets andaverage cost of liabilities for the periods indicated.  These yields and costs are derived bydividing income or expense by the average daily balance of assets orliabilities, respectively, for the periods presented.

 
| ** **                                                             | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                             | ** ** | **September 30,** | ** ** |
| ** **                                                             | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **Average**            | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                             | ** ** | **Balance**            | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **Interest-earning  assets:**                                          |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)                                                               |       | $                      | 1,190,852  |   | $ | 21,335 |   | 7.11 | % | $ | 986,540 |   | $ | 15,796 |   | 6.37 | % |
| Investment securities                                                  |       | 62,860                 |       | 626 |   | 3.95 | % | 38,084 |   | 344 |   | 3.59 | % |
| Other short-term  investments                                          |       | 18,123                 |       | 154 |   | 3.37 | % | 708 |   | 2 |   | 1.12 | % |
| Total interest-earning  assets                                         |       | $                      | 1,271,835  |   | $ | 22,115 |   | 6.90 | % | $ | 1,025,332 |   | $ | 16,142 |   | 6.26 | % |
| Noninterest earning  assets                                            |       | 104,047                |       |   |   |   |   | 95,583 |   |   |   |   |   |
| Total assets                                                           |       | $                      | 1,375,882  |   |   |   |   |   | $ | 1,120,915 |   |   |   |   |   |
|                                                                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                                     |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                              |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Now accounts, money  market and Savings                                |       | $                      | 406,431    |   | $ | 1,449 |   | 1.41 | % | $ | 323,058 |   | $ | 395 |   | 0.49 | % |
| Time deposits                                                          |       | 611,800                |       | 4,836 |   | 3.14 | % | 442,605 |   | 2,270 |   | 2.04 | % |
| Total interest-bearing  deposits                                       |       | $                      | 1,018,231  |   | $ | 6,285 |   | 2.45 | % | $ | 765,663 |   | $ | 2,665 |   | 1.38 | % |
| Securities sold under  repurchase agreements and short-term borrowings |       | 13,551                 |       | 98 |   | 2.87 | % | 17,050 |   | 45 |   | 1.05 | % |
| Notes payable                                                          |       | 78,090                 |       | 974 |   | 4.95 | % | 101,304 |   | 877 |   | 3.44 | % |
| Subordinated debentures                                                |       | 13,403                 |       | 210 |   | 6.22 | % | 10,310 |   | 143 |   | 5.52 | % |
| Total interest-bearing  liabilities                                    |       | $                      | 1,123,275  |   | $ | 7,567 |   | 2.67 | % | $ | 894,327 |   | $ | 3,730 |   | 1.66 | % |
|                                                                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Noninterest  bearing liabilities:**                                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                        |       | 120,460                |       |   |   |   |   | 105,343 |   |   |   |   |   |
| Other liabilities                                                      |       | 14,686                 |       |   |   |   |   | 13,359 |   |   |   |   |   |
| Total noninterest  bearing liabilities                                 |       | 135,146                |       |   |   |   |   | 118,702 |   |   |   |   |   |
| Total liabilities                                                      |       | 1,258,421              |       |   |   |   |   | 1,013,029 |   |   |   |   |   |
| Shareholders’ equity                                              |       | 117,461                |       |   |   |   |   | 107,886 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity                       |       | $                      | 1,375,882  |   |   |   |   |   | $ | 1,120,915 |   |   |   |   |   |
|                                                                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                    |       |                   |       | $ | 14,548 |   |   |   |   |   | $ | 12,412 |   |   |   |
|                                                                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                                                   |       |                   |       |   |   | 4.23 | % |   |   |   |   | 4.60 | % |
|                                                                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest-earning assets                                  |       |                   |       |   |   | 4.54 | % |   |   |   |   | 4.82 | % |

 

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(1)          Average loan balancesinclude nonaccrual loans. Interest income collected on nonaccrual loans hasbeen included.

 

17

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| ** **                                                             | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                             | ** ** | **September 30,** | ** ** |
| ** **                                                             | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **Average**            | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                             | ** ** | **Balance**            | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **Interest-earning  assets:**                                          |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)                                                               |       | $                      | 1,137,400  |   | $ | 59,265 |   | 6.97 | % | $ | 979,946 |   | $ | 46,843 |   | 6.39 | % |
| Investment securities                                                  |       | 58,229                 |       | 1,691 |   | 3.88 | % | 40,118 |   | 1,069 |   | 3.56 | % |
| Other short-term  investments                                          |       | 28,446                 |       | 597 |   | 2.81 | % | 4,110 |   | 29 |   | 0.94 | % |
| Total interest-earning  assets                                         |       | $                      | 1,224,075  |   | $ | 61,553 |   | 6.72 | % | $ | 1,024,174 |   | $ | 47,941 |   | 6.25 | % |
| Noninterest earning assets                                             |       | 103,577                |       |   |   |   |   | 98,509 |   |   |   |   |   |
| Total assets                                                           |       | $                      | 1,327,652  |   |   |   |   |   | $ | 1,122,683 |   |   |   |   |   |
|                                                                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                                     |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                              |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Now accounts, money  market and savings                                |       | $                      | 399,016    |   | $ | 3,476 |   | 1.16 | % | $ | 334,421 |   | $ | 1,200 |   | 0.48 | % |
| Time deposits                                                          |       | 578,403                |       | 12,572 |   | 2.91 | % | 463,710 |   | 7,657 |   | 2.21 | % |
| Total interest-bearing  deposits                                       |       | $                      | 977,419    |   | $ | 16,048 |   | 2.20 | % | $ | 798,131 |   | $ | 8,857 |   | 1.48 | % |
| Securities sold under  repurchase agreements and short-term borrowings |       | 15,646                 |       | 282 |   | 2.41 | % | 16,901 |   | 112 |   | 0.89 | % |
| Notes payable                                                          |       | 76,978                 |       | 2,771 |   | 4.81 | % | 74,893 |   | 2,328 |   | 4.15 | % |
| Subordinated debentures                                                |       | 11,364                 |       | 505 |   | 5.94 | % | 10,310 |   | 369 |   | 4.78 | % |
| Total interest-bearing  liabilities                                    |       | $                      | 1,081,407  |   | $ | 19,606 |   | 2.42 | % | $ | 900,235 |   | $ | 11,666 |   | 1.73 | % |
|                                                                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Noninterest  bearing liabilities:**                                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                        |       | 117,930                |       |   |   |   |   | 103,624 |   |   |   |   |   |
| Other liabilities                                                      |       | 14,387                 |       |   |   |   |   | 12,984 |   |   |   |   |   |
| Total noninterest  bearing liabilities                                 |       | 132,317                |       |   |   |   |   | 116,608 |   |   |   |   |   |
| Total liabilities                                                      |       | 1,213,724              |       |   |   |   |   | 1,016,843 |   |   |   |   |   |
| Shareholders’ equity                                              |       | 113,928                |       |   |   |   |   | 105,840 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity                       |       | $                      | 1,327,652  |   |   |   |   |   | $ | 1,122,683 |   |   |   |   |   |
|                                                                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                    |       |                   |       | $ | 41,947 |   |   |   |   |   | $ | 36,275 |   |   |   |
|                                                                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                                                   |       |                   |       |   |   | 4.30 | % |   |   |   |   | 4.52 | % |
|                                                                   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest-earning assets                                  |       |                   |       |   |   | 4.58 | % |   |   |   |   | 4.73 | % |

 

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(1)          Average loan balances include nonaccrual loans. Interest incomecollected on nonaccrual loans has been included.

 

18

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**Provision for Loan Losses. **During the three and ninemonths ended September 30, 2005, loan charge-offs were $1,325 and $3,806,respectively, and recoveries of charged-off loans were $381 and $1,339,respectively. The Company’s provision for loan losses increased by $642, or60.45%, and $639, or 17.05%, to $1,704 and $4,386 for the three and nine monthsended September 30, 2005, respectively, as compared to $1,062 and $3,747for the same periods in 2004. The Company’s allowance for loan losses increasedby $1,919 to $17,640 at September 30, 2005 from $15,721 at December 31,2004, with the ratio of the allowance for loan losses to total loans, net of unearnedincome, declining to 1.45% at September 30, 2005 from 1.50% and 1.51% at December 31,2004 and September 30, 2004, respectively. As of September 30, 2005,indicators of credit quality, as discussed below, are mixed compared to December 31,2004 but generally improved compared to September 30, 2004. Managementcontinually evaluates the Company’s credit policies and procedures foreffective risks and controls management.  The Company’s trend in assetquality improvement is attributable to improved underwriting policies andmanagement controls.  Management believes the Company’s asset qualityindicators are sustainable within the current economic environment. The ratioof allowance for loan losses to nonperforming assets was 166.27%, 185.56% and120.52% at September 30, 2005, December 31, 2004 and September 30,2004, respectively, and the ratio of nonperforming assets to total assets was0.75%, 0.69% and 1.10% at September 30, 2005, December 31, 2004 and September 30,2004, respectively. The ratio of nonperforming loans to total loans, excludingloans held for sale, was 0.58%, 0.66% and 0.83% at September 30, 2005, December 31,2004 and September 30, 2004, respectively. Within the Bank, the Company’s largest subsidiary, the ratio ofnonperforming assets to total assets was 0.70%, 0.61% and 1.01% at September 30,2005, December 31, 2004 and September 30, 2004, respectively.

 

The Company’s annualized net charge-offs for the ninemonths ended September 30, 2005 were $3,289 compared to actual netcharge-offs of $5,042 for the year ended December 31, 2004.  Annualized net charge-offs as a percentage of average loans improved from 0.47% forthe nine months ended September 30, 2004 to 0.29% for the nine monthsended September 30, 2005.  Netcharge-offs as a percentage of average loans were 0.51% for the year ended December 31,2004.  Within the Bank, annualizednet charge-offs as a percentage of average loans fell from 0.30% for the ninemonths ended September 30, 2004 to 0.17% for the same period in 2005. Netcharge-offs within the Bank as a percentage of average loans were 0.35% for theyear ended December 31, 2004. Annualized net charge-offs in the Bank for the nine months ended September 30,2005 were $1,959 compared to actual net charge-offs of $3,418 for the yearended December 31, 2004.  Annualized net charge-offs in SuperiorFinancial for the nine months ended September 30, 2005 were $425 comparedto actual net charge-offs of $525 for the year ended December 31, 2004.Annualized net charge-offs in GCB Acceptance for the nine months ended September 30,2005 were $905 compared to actual net charge-offs of $1,099 for the year ended December 31,2004. At this point, management believes that total net charge-offs for 2005 willimprove throughout the Company compared to 2004 net charge-offs****based on 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 September 30, 2005.  Atthis point, management anticipates that the provision for loan losses duringthe fourth quarter of 2005 will be consistent with the third quarter of 2005.  However, the provision for loan losses shouldincrease for the entire year of 2005, as compared to 2004, primarily due to theCompany’s significant loan growth experienced through the nine months ended September 30,2005.

 

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

 

Total noninterest income for the three and nine monthsended September 30, 2005 was $3,796 and $10,435 as compared to $3,020 and$9,184, respectively, for the same periods in 2004. Service charges,commissions and fees remain the largest component of total noninterest incomeand increased from $2,436 and $7,349 for the three and nine months,respectively, ended September 30, 2004 to $3,159 and $8,137, respectively,for the same periods in 2005. This increase primarily reflects additionalservice charges and NSF fees from deposit-related products stemming primarilyfrom increased volume as a result of the Bank’s High Performance CheckingProgram introduced in the first quarter of 2005 and also its expansion efforts.  The Company believes that noninterest incomewill continue to improve over the fourth quarter of 2005 when compared to priorcomparable periods as a result of the increased volume in deposits resulting fromthe Bank’s expansion efforts and its new High Performance CheckingProgram.  In addition, other noninterestincome increased by $53 and $463 to $637 and $2,298 for the three and ninemonths ended September 30, 2005, respectively, from $584 and $1,835 forthe same periods in 2004.  This increasefor the nine months ended September 30, 2005 is primarily attributable toincreased fees of $192 from the sale of mutual funds and annuities and $99 fromthe sale of the Company’s interest in an ATM network vendor.

 

19

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**Noninterest Expense.**  Control of noninterest expense is also animportant aspect in enhancing income. Noninterest expense includes personnel,occupancy, and other expenses such as data processing, printing and supplies,legal and professional fees, postage, FDIC assessment, etc. Total noninterestexpense was $10,691 and $31,388 for the three and nine months ended September 30,2005 compared to $9,211 and $26,736 for the same periods in 2004. The $1,480,or 16.07%, increase in total noninterest expense for the three months ended September 30,2005 compared to the same period of 2004 principally reflects increases in allexpense categories primarily as a result of the Company’s expansion program aswell as costs of approximately $400 associated with the Bank’s High PerformanceChecking Program, which the Company expects will continue for the remainder of2005. This program is designed to generate significant numbers and balances ofcore transaction accounts.

 

Similarly, the $4,652, or 17.40%, increase in totalnoninterest expense for the nine months ended September 30, 2005 comparedto the same period in 2004 reflects substantially the same trends that existedduring the quarter ended September 30, 2005.

 

Personnel costs are theprimary element of the Company’s noninterest expenses. For the three and ninemonths ended September 30, 2005, salaries and benefits represented $5,366,or 50.19%, and $15,710, or 50.05%, respectively, of total noninterest expense.This was an increase of $566, or 11.79%, and $1,739, or 12.45%, respectively,from $4,800 and $13,971 for the three and nine months ended September 30,2004.  Including Bank branches and non-Bankoffice locations, the Company had 54 locations at September 30, 2005 and 53at December 31, 2004, as compared to 49 at September 30, 2004, andthe number of full-time equivalent employees increased 7.79% from 462 at September 30,2004 to 498 at September 30, 2005. These increases in personnel costs, number of branches and employees areprimarily the result of the Company’s expansion initiatives and are expected toincrease for the remainder of 2005 with the Company’s continued expansionefforts in Middle Tennessee and Knoxville and as a result of the Clarksvilletransaction.

 

The Company’s efficiency ratio decreased slightly forthe three months ended September 30, 2005 to 58.28% from 59.69% for thethree months ended September 30, 2004, primarily due to both increased netinterest income and noninterest income. However, the Company’s efficiency ratio increased slightly for the ninemonths ended September 30, 2005 to 59.92% from 58.81% for the nine monthsended September 30, 2004.  Theefficiency ratio illustrates how much it cost the Company to generate revenue.For example, it cost the Company 59.92 cents to generate one dollar of revenuefor the nine months ended September 30, 2005 as compared to 58.81 centsfor the nine months ended September 30, 2004.  The Company believes that its efficiencyratio will continue to be negatively impacted for the remainder of 2005 as aresult of its continued expansion efforts.

 

**Income Taxes. **The effective income tax rate for the three and ninemonths ended September 30, 2005 was 38.21% and 37.83%, respectively,compared to 37.72% and 37.64% for the same periods in 2004.

 

**Changesin Financial Condition**

 

Total assets at September 30, 2005 were $1,405,580,an increase of $172,177, or 13.96%, from total assets of $1,233,403 at December 31,2004. The increase in assets was primarily reflective of the $166,286, or 16.13%,increase, as reflected on the Condensed Consolidated Balance Sheets, in netloans, excluding loans held for sale, and was funded primarily by the $136,842,or 13.71%, increase in deposits resulting from the Company’s expansion efforts,its High Performance Checking Program and its aggressive deposit pricing andother promotions.  The Company’s publicoffering of common stock in the amount of $44,073 (see “Liquidity and CapitalResources; Capital Resources” below) also provided funding for the increase inassets.

 

At September 30,2005, loans, net of unearned income and allowance for loan losses, were$1,197,432 compared to $1,031,146 at December 31, 2004, an increase of $166,286,or 16.13%, from December 31, 2004. The increase in loans during the first ninemonths of 2005 primarily reflects an increase in commercial real estate loansand commercial loans and the growth in the loan portfolio of Middle TennesseeBank & Trust in the Nashville MSA and American Fidelity Bank in theBank’s Knoxville region.

 

Non-performing loansinclude non-accrual loans and loans 90 or more days past due. All loans thatare 90 days past due are considered non-accrual unless they are adequatelysecured and there is reasonable assurance of full collection of principal andinterest. Non-accrual loans that are 120 days past due without assurance ofrepayment are charged off against the allowance for loan losses. Nonaccrualloans and loans past due 90 days and still accruing increased slightly by $194,or 2.81%, at September 30, 2005 to $7,100 from $6,906 at December 31,2004.  At 

 

20

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September 30,2005, the ratio of the Company’s allowance for loan losses to non-performingassets (which include non-accrual loans) was 166.27% compared to 185.56% at December 31,2004.

 

The Company maintains aninvestment portfolio to provide liquidity and earnings. Investments at September 30,2005 with an amortized cost of $57,416 had a market value of $57,172. At December 31,2004, investments with an amortized cost of $39,742 had a market value of$39,824. The increase in investments from December 31, 2004 to September 30,2005 results from the purchase of short-term federal agency securities as wellas mortgage-backed securities reflecting management’s decision to channel moreof the Company’s liquid assets into more favorable positions on the yieldcurve.

 

**Liquidityand Capital Resources**

 

**Liquidity. **Liquidity refers to theability or the financial flexibility to manage future cash flows to meet theneeds of depositors and borrowers and fund operations. Maintaining appropriatelevels of liquidity allows the Company to have sufficient funds available forreserve requirements, customer demand for loans, withdrawal of deposit balancesand maturities of deposits and other liabilities. The Company’s liquid assetsinclude cash and due from banks, federal funds sold, investment securities andloans held for sale. Including securities pledged to collateralize municipaldeposits, these assets represented 9.28% of the total liquidity base at September 30,2005, as compared to 10.63% at December 31, 2004. The liquidity base isgenerally defined to include deposits, repurchase agreements, notes payable andsubordinated debentures.  In addition,the Company has additional borrowing availability with the Federal Home LoanBank of Cincinnati (“FHLB”) approximating $53,988 at September 30, 2005.The Company also maintains federal funds lines of credit totaling $111,000 atnine correspondent banks, of which all was available at September 30, 2005and the Company had $35,000 available under its Credit Agreement describedbelow. The Company believes it has sufficient liquidity to satisfy its currentoperating needs.

 

For the nine months endedSeptember 30, 2005, operating activities of the Company provided $8,681 ofcash flows. Net income of $10,325 comprised a substantial portion of the cashgenerated from operations.  Cash flowsfrom operating activities were also positively affected by various non-cashitems, including (i) $4,386 in provision for loan losses, and (ii) $2,673of depreciation and amortization. These increases in cash flows were offset by (i) a$1,891 decrease in accrued interest payable and other liabilities, (ii) a $1,962increase in other assets, and (iii) a deferred tax benefit of $1,227. Inaddition, the cash flows used by the originations of mortgage loans held forsale exceeded the cash flows provided from the proceeds from sales of mortgageloans by $2,771.

 

The Company’s net increasein loans used $174,770 in cash flows and was the primary component of the$196,884 in net cash used in investing activities for the nine months ended September 30,2005. In addition, the Company purchased $21,310 in investment securities availablefor sale.  Purchases of additionalinsurance related to certain benefit plans used $3,657 in cash flows, and fixedasset additions, net of proceeds from sale of fixed assets, used $2,849 in cashflows.

 

 The net increase in deposits of $136,842 was theprimary source of cash flows from financing activities. Also on September 28,2005, the Company issued 1,833,043 shares of common stock as part of a publicoffering, providing $44,073 in cash flows. These cash flows were offset, in part, by the excess of repayments ofnotes payable over proceeds from notes payable in the amount of $14,980. Inaddition, dividends paid in the amount of $2,754 further reduced the total netcash provided from financing activities.

 

**Capital Resources. **The Company’s capital position is reflected in itsshareholders’ equity, subject to certain adjustments for regulatory purposes.Shareholders’ equity, or capital, is a measure of the Company’s net worth,soundness and viability. The Company continues to exhibit a strong capitalposition while consistently paying dividends to its shareholders. Further, thecapital base of the Company allows it to take advantage of businessopportunities while maintaining the level of resources deemed appropriate bymanagement of the Company to address business risks inherent in the Company’sdaily operations.

 

On September 25, 2003, the Company issued $10,310of subordinated debentures, as part of a privately placed pool of trustpreferred securities.  The securities,due in 2033, bear interest at a floating rate of 2.85% above the three-monthLIBOR rate, reset quarterly, and are callable in five years from the date ofissuance without penalty.  The Companyused the proceeds of the offering to support its acquisition of IBC, and thecapital raised from the offering qualifies as Tier 1 capital for regulatorypurposes.

 

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On June 28, 2005, the Company issued anadditional $3,093 of subordinated debentures, as part of a privately placedpool of trust preferred securities.  Thesecurities, due in 2035, bear interest at a floating rate of 1.68% above thethree-month LIBOR rate, reset quarterly, and are callable in five years fromthe date of issuance without penalty. The Company used the proceeds to augment its capital position in connectionwith its significant asset growth, and the capital raised from the offeringqualifies as Tier 1 capital for regulatory purposes.

 

On September 28, 2005, the Company completed thesale of 1,833,043 shares of its common stock at $25.75 per share in a publicoffering. This sale generated proceeds of $44,073, net of expenses.

 

Shareholders’ equity on September 30, 2005 was$160,307, an increase of $51,589, or 47.45%, from $108,718 on December 31,2004. The increase in shareholders’ equity primarily reflected (i) theissuance of 1,833,043 shares of common stock resulting in proceeds of $44,073,net of expenses, and (ii) net income for the nine months ended September 30,2005 of $10,325 ($1.33 per share, assuming dilution). This increase was offsetby quarterly dividend payments during the nine months ended September 30,2005 totaling $2,754 ($0.36 per share).

 

On September 18, 2002 theCompany announced that its Board of Directors had authorized the repurchase ofup to $2,000 of the Company’s outstanding shares of common stock beginning in October 2002.The repurchase plan was renewed by the Board of Directors in September 2003.On June 4, 2004 the Company announced that its Board of Directors hadapproved an increase in the amount authorized to be repurchased from $2,000 to$5,000. The repurchase plan is dependent upon market conditions. To date, theCompany has purchased 25,700 shares at an aggregate cost of approximately $538under this program, which was renewed by the Company’s Board of Directors on November 15,2004. Unless extended, the repurchase program will terminate on theearlier to occur of the Company’s repurchase of the total authorized dollaramount of the Company’s common stock or December 1, 2005.

 

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 dependent on the level of earnings,capital and liquidity requirements and considerations of the Bank.

 

Risk-based capitalregulations adopted by the Board of Governors of the Federal Reserve Board (“FRB”)and the Federal Deposit Insurance Corporation (“FDIC”) require bank holdingcompanies and banks, respectively, to achieve and maintain specified ratios ofcapital to risk-weighted assets. The risk-based capital rules are designedto measure Tier 1 Capital and Total Capital in relation to the credit risk ofboth on- and off-balance sheet items. Under the guidelines, one of four risk weights is applied to thedifferent on-balance sheet items. Off-balance sheet items, such as loan commitments, are also subject torisk-weighting after conversion to balance sheet equivalent amounts. All bankholding companies and banks must maintain a minimum total capital to totalrisk-weighted assets ratio of 8.00%, at least half of which must be in the formof core, or Tier 1, capital (consisting of common equity, retained earnings,and a limited amount of qualifying perpetual preferred stock and trustpreferred securities, net of goodwill and other intangible assets andaccumulated other comprehensive income). These guidelines also specify that bank holding companies that areexperiencing internal growth or making acquisitions will be expected tomaintain strong capital positions substantially above the minimum supervisorylevels. At September 30, 2005, the Bank and the Company each satisfiedtheir respective minimum regulatory capital requirements, and the Bank was “well-capitalized”within the meaning of federal regulatory requirements.  The table below sets forth the capitalposition of the Bank and the Company at September 30, 2005. 

 
| ** **                 | ** ** | **Required  Minimum  Ratio** | ** ** | **Required  to be  Well Capitalized** | ** ** | **Bank** | ** ** | **Company** | ** ** |
|----------------------------|------------|------------------------------|------------|---------------------------------------|------------|----------|------------|-------------|------------|
| Tier 1 risk-based  capital |       | 4.00                         | %          | 6.00                                  | %          | 11.72    | %          | 12.39       | %          |
| Total risk-based  capital  |       | 8.00                         | %          | 10.00                                 | %          | 12.97    | %          | 13.64       | %          |
| Leverage Ratio             |       | 4.00                         | %          | 5.00                                  | %          | 10.52    | %          | 11.11       | %          |

 

The Company contributed approximately $35,000 of thenet proceeds of its public offering described above to the Bank to providecapital for the Clarksville transaction. The remainder of the net proceeds willbe used for general corporate purposes, including among other things, tosupport the Bank’s internal growth and capital needs.

 

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On August 30, 2005, the Company entered into andbecame obligated under a Revolving Credit Agreement (the “Credit Agreement”) byand between the Company and SunTrust Bank (“SunTrust”) pursuant to whichSunTrust has agreed to loan the Company up to $35,000, with such maximum amountavailable under the Credit Agreement being reduced to $15,000 after November 30,2005 (the “Loan”).

 

SunTrust’s obligation to make the Loan to the Companyterminates on August 29, 2006, unless the Loan is extended or earlierterminated, in accordance with the terms of the Credit Agreement. Advancesunder the Loan will bear interest, at the Company’s discretion, at a rate ofone, two, three or six month LIBOR plus 1.75% per annum from August 30,2005 to November 30, 2005 and at a rate of one, two, three or six monthLIBOR plus 1.25% per annum from November 30, 2005 to the end of the Loan’sterm.  The Company also must pay SunTrusta commitment fee equal to 0.15% per annum on the average daily amount of theLoan that has not been borrowed by the Company.

 

The Loan is secured by SunTrust’s lien and securityinterest in all of the outstanding common stock of the Bank pursuant to theterms of a Security Agreement entered into by and between the Company andSunTrust dated as of August 30, 2005. The Credit Agreement contains certain financial covenants that requirethe Company and the Bank to, among other things, (i) maintain a ratio oftangible net worth to total tangible assets of at least 4.5% from August 30,2005 to November 30, 2005 and of at least 6.5% thereafter; (ii) achievea return on total average assets of not less than 0.80% for each fiscal quarterand the previous three fiscal quarters; (iii) keep its ratio ofnonperforming assets to total loans and other real estate owned below 1.75%;and (iv) achieve certain capital ratios.

 

The Company has not yet drawn on the Credit Agreement,as the public offering of common stock, discussed above, provided the neededregulatory capital for the Clarksville transaction.

 

**Off-Balance Sheet Arrangements**

 

At September 30, 2005, the Company had outstanding unused lines of credit and standby letters of credit totaling $490,258 and unfunded loan commitments outstanding of $49,193.  Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements.  If needed to fund these outstanding commitments, the Company has the ability to liquidate federal funds sold or securities available-for-sale or, on a short-term basis, to borrow any then available amounts from the FHLB and/or purchase Federal funds from other financial institutions.  At September 30, 2005, the Company had accommodations with upstream correspondent banks for unsecured federal funds lines.  These accommodations have various covenants related to their term and availability, and in most cases must be repaid within less than a month.  The following table presents additional information about the Company’s off-balance sheet commitments as of September 30, 2005, which by their terms have contractual maturity dates subsequent to September 30, 2005:

 
| ** **                              | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|---------------|------------|---------------|------------|------------------------|------------|-----------|------------|
| Commitments to make  loans – fixed |       | $                     | 4,482      |          | $          | —        |       | $                      | —     |      | $          | — |   | $ | 4,482 |   |
| Commitments to make  loans - variable   |       | 44,711                |       | —        |       | —        |       | —                 |       | 44,711    |       |
| Unused lines of credit                  |       | 308,305               |       | 56,516        |       | 12,721        |       | 83,339                 |       | 460,881   |       |
| Letters of credit                       |       | 9,068                 |       | 20,309        |       | —        |       | —                 |       | 29,377    |       |
| Total                                   |       | $                     | 366,566    |          | $          | 76,825        |       | $                      | 12,721     |      | $          | 83,339 |   | $ | 539,451 |   |

 

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**Disclosure of Contractual Obligations**

 

In the ordinary course ofoperations, the Company enters into certain contractual obligations.  Such obligations include the funding ofoperations through debt issuances as well as leases for premises andequipment.  The following tablesummarizes the Company’s significant fixed and determinable contractualobligations as of   September 30,2005:

 
| ** **                          | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|-----------------------|------------|---------------|------------|---------------|------------|------------------------|------------|-----------|------------|
| Deposits without a  stated maturity |       | $                     | 542,467    |          | $          | —        |       | $                      | —     |      | $          | — |   | $ | 542,467 |   |
| Certificate of deposits             |       | 436,687               |       | 106,419       |       | 48,695        |       | 596                    |       | 592,397   |       |
| Repurchase agreements               |       | 11,393                |       | —        |       | —        |       | —                 |       | 11,393    |       |
| FHLB advances and notes  payable    |       | 379                   |       | 2,608         |       | 60,348        |       | 6,905                  |       | 70,240    |       |
| Subordinated debentures             |       | —                |       | —        |       | —        |       | 13,403                 |       | 13,403    |       |
| Operating lease  obligations        |       | 614                   |       | 970           |       | 386           |       | 1,182                  |       | 3,152     |       |
| Deferred compensation               |       | 403                   |       | 1,199         |       | —        |       | 758                    |       | 2,360     |       |
| Purchase obligations                |       | 179                   |       | —        |       | —        |       | —                 |       | 179       |       |
| Total                               |       | $                     | 992,122    |          | $          | 111,196       |       | $                      | 109,429    |      | $          | 22,844 |   | $ | 1,235,591 |   |

 

Additionally, the Company routinely enters intocontracts for services.  These contractsmay require payment for services to be provided in the future and may alsocontain penalty clauses for early termination of the contract.  Management is not aware of any additionalcommitments or contingent liabilities which may have a material adverse impacton the liquidity or capital resources of the Company.

 

**Effect of New Accounting Standards**

 

In December 2004,the FASB issued SFAS No. 123(R), *Share-Based Payment*(SFASNo. 123(R)).  SFAS No. 123(R)establishes standards for the accounting for transactions in which an entityexchanges its equity instruments for goods or services.  This Statement focuses primarily onaccounting for transactions in which an entity obtains employee services inshare-based payment transactions.  SFAS No. 123(R)requires that the fair value of such equity instruments be recognized as anexpense in the historical financial statements as services are performed.  Prior to SFAS No. 123(R), only certainpro forma disclosures of fair value were required.  The provisions of this Statement areeffective for the first fiscal year reporting period beginning after June 15,2005. Accordingly, the Company will adopt SFAS No. 123(R) commencing withthe quarter ending March 31, 2006. Had the fair value of employee stock option compensation been includedin the consolidated financial statements, net income for the nine month periodsended September 30, 2005 and 2004 would have been decreased by $159 and $113,respectively.

 

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

 

Acomprehensive qualitative and quantitative analysis regarding market risk wasdisclosed in the Company’s Form 10-K for the year ended December 31,2004.  No material changes in theassumptions used in preparing, or results obtained from, the model haveoccurred since December 31, 2004.

 

Actual results for the yearending December 31, 2005 will differ from simulated results due to timing,magnitude, and frequency of interest rate changes, as well as changes in marketconditions and management strategies.

 

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

 

**Evaluation of Disclosure Controls and Procedures**

 

The Company maintains disclosure controls andprocedures, as defined in Rule 13a-15(e) promulgated under theSecurities Exchange Act of 1934 (the “Exchange Act”), that are designed toensure that information required to be disclosed by it in the reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and formsand that such information is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.  The Company carried out an evaluation, underthe supervision and with the participation of its management, including itsChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of its disclosure controls and procedures as of theend of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, theChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective.

 

**Changes in Internal Control Over Financial Reporting**

 

There were no changes in the Company’s internalcontrol over financial reporting during the Company’s fiscal quarter ended September 30,2005 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**PART II- OTHER INFORMATION**

 

**Item 1.**                                   Legal Proceedings

 

The Company and its subsidiaries are subject to claimsand suits 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.****                                  ****Unregistered Sales ofEquity Securities and Use of Proceeds**

 

The Company made no unregistered sales of its equitysecurities or repurchases of its common stock during the quarter ended September 30,2005.

 

**Item 3.**                                   Defaults upon Senior Securities

 

None.

 

**Item 4.**                                   Submission of Matters to a Vote ofSecurity Holders

 

None.

 

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

 

None.

** **

**Item 6.**                                   Exhibits 

 

Exhibit No. 1.1                                      UnderwritingAgreement dated as of September 22, 2005 among Greene County Bancshares, Inc.and Keefe, Bruyette & Woods, Inc. for itself and asrepresentative for the underwriters listed on Schedule A thereto –incorporated herein by reference to the Company’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on September 26, 2005

 

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Exhibit No. 10.1                                RevolvingCredit Agreement dated as of August 30, 2005, by and between the Companyand SunTrust Bank

 

Exhibit No. 10.2                                Form ofRevolving Credit Note

 

Exhibit No. 31.1                                ChiefExecutive Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a)

 

Exhibit No. 31.2                                ChiefFinancial Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a)

 

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

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | Greene County Bancshares, Inc. |                                              |
|--------|-------------------------------------|---------------------------------------------------|
|   | Registrant                          |                                              |
|   |                                |                                              |   |
|   |                                |                                              |   |
| Date:  | November 7, 2005               |                                              | By: | /s/ | R. Stan Puckett |   |
|   |                                | R. Stan Puckett                                   |
|   |                                | Chairman of the Board and Chief Executive Officer |
|   |                                | (Duly authorized representative)                  |
|   |                                |                                              |   |
|   |                                |                                              |   |
| Date:  | November 7, 2005               |                                              |   | /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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**EXHIBIT INDEX**

 
| Exhibit No. 1.1  |   | Underwriting Agreement dated as of September 22,  2005 among Greene County Bancshares, Inc. and Keefe, Bruyette &  Woods, Inc. for itself and as representative for the underwriters listed  on Schedule A thereto – incorporated herein by reference to the Company’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on September 26, 2005 |
|----------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Exhibit No. 10.1 |   | Revolving Credit Agreement dated as of August 30,  2005, by and between the Company and SunTrust Bank                                                                                                                                                                                                                                                                                                                   |
|                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Exhibit No. 10.2 |   | Form of Revolving Credit Note                                                                                                                                                                                                                                                                                                                                                                                           |
|                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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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