** **

**UNITED STATES**SECURITIES ANDEXCHANGE COMMISSIONWashington, D.C. 20549

 

**FORM 10-Q**

 

(Mark One)

x          **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For thequarterly period ended March 31, 2006**

**OR**

o             **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For thetransition period from _____________________ to ________________**

** **

**Commissionfile number   0-14289**

** **

**GREENECOUNTY BANCSHARES, INC.**

(Exact name ofregistrant as specified in its charter)

 
| **Tennessee**                                                                       | ** ** | **62-1222567**                        | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| (State or other jurisdiction of                                                     |       | (I.R.S. Employer  Identification No.) |       |
| incorporation or organization)                                                      |       |                                  |       |
|                                                                                |       |                                  |       |
| **100 North Main Street, Greeneville, Tennessee**                                   | ** ** | **37743-4992**                        |       |
| (Address of principal executive offices)                                            |       | (Zip Code)                            |       |
|                                                                                |       |                                  |       |
| Registrant’s  telephone number, including area code:   **(423) 639-5111** |       |
|                                                                                |       |                                  |       |
| **Not  Applicable**                                                                 |       |
| (Former name,  former address and former fiscal year, if changed since last report) |       |

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES x  NO o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

Large accelerated filer o        Accelerated filer x          Non-accelerated filer o

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

Asof May 9, 2006, the number of shares outstanding of the issuer’s commonstock was: 9,787,645.

 

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**PART 1— FINANCIAL INFORMATION**

 

**ITEM 1.       FINANCIAL STATEMENTS**

The unaudited condensedconsolidated financial statements of Greene County Bancshares, Inc. andits wholly owned subsidiaries are as follows:

Condensed Consolidated Balance Sheets— March 31, 2006 and December 31, 2005.

Condensed ConsolidatedStatements of Income and Comprehensive Income - For the three months ended March 31,2006 and 2005.

Condensed ConsolidatedStatement of Change in Shareholders’ Equity — For the three months ended March 31,2006.

Condensed ConsolidatedStatements of Cash Flows - For the three months ended March 31, 2006 and2005.

Notes to Condensed Consolidated Financial Statements.

1

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**GREENECOUNTY BANCSHARES, INC.CONDENSED CONSOLIDATED BALANCE SHEETSMarch 31, 2006 and December 31, 2005(Amounts in thousands, exceptshare and per share data)**
| ** **                                                                                        | ** ** | **(Unaudited)  March 31,  2006** | ** ** | **December 31,  2005*** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------|------------|
| **Assets**                                                                                        |       |                                  |       |                         |       |
|                                                                                              |       |                                  |       |                         |       |
| Cash and due  from banks                                                                          |       | $                                     | 39,189     |                         | $          | 46,136 |   |
|                                                                                              |       |                                  |       |                         |       |
| Federal funds sold                                                                                |       | 1,341                                 |       | 28,387                       |       |
|                                                                                              |       |                                  |       |                         |       |
| Securities available  for sale                                                                    |       | 44,311                                |       | 48,868                       |       |
|                                                                                              |       |                                  |       |                         |       |
| Securities held to  maturity (with a market value of $3,003 and $3,335)                           |       | 3,049                                 |       | 3,379                        |       |
|                                                                                              |       |                                  |       |                         |       |
| FHLB, Bankers Bank and  other stock, at cost                                                      |       | 6,795                                 |       | 6,489                        |       |
|                                                                                              |       |                                  |       |                         |       |
| Loans held for sale                                                                               |       | 1,957                                 |       | 2,686                        |       |
|                                                                                              |       |                                  |       |                         |       |
| Loans, net of unearned  interest                                                                  |       | 1,404,627                             |       | 1,378,642                    |       |
|                                                                                              |       |                                  |       |                         |       |
| Allowance for loan  losses                                                                        |       | (20,083                               | )          | (19,739                      | )          |
|                                                                                              |       |                                  |       |                         |       |
| Premises and equipment,  net                                                                      |       | 52,109                                |       | 49,985                       |       |
|                                                                                              |       |                                  |       |                         |       |
| Goodwill and other intangible  assets                                                             |       | 39,352                                |       | 39,622                       |       |
|                                                                                              |       |                                  |       |                         |       |
| Other assets                                                                                      |       | 35,593                                |       | 35,534                       |       |
|                                                                                              |       |                                  |       |                         |       |
| Total assets                                                                                      |       | $                                     | 1,608,240  |                         | $          | 1,619,989 |   |
|                                                                                              |       |                                  |       |                         |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                     | ** ** | ** **                            | ** ** | ** **                   | ** ** |
|                                                                                              |       |                                  |       |                         |       |
| Liabilities                                                                                       |       |                                  |       |                         |       |
|                                                                                              |       |                                  |       |                         |       |
| Deposits                                                                                          |       | $                                     | 1,285,738  |                         | $          | 1,295,879 |   |
|                                                                                              |       |                                  |       |                         |       |
| Repurchase agreements                                                                             |       | 17,966                                |       | 17,498                       |       |
|                                                                                              |       |                                  |       |                         |       |
| FHLB advances and notes  payable                                                                  |       | 97,052                                |       | 105,146                      |       |
|                                                                                              |       |                                  |       |                         |       |
| Subordinated debentures                                                                           |       | 13,403                                |       | 13,403                       |       |
|                                                                                              |       |                                  |       |                         |       |
| Accrued interest  payable and other liabilities                                                   |       | 21,764                                |       | 20,042                       |       |
|                                                                                              |       |                                  |       |                         |       |
| Total liabilities                                                                                 |       | 1,435,923                             |       | 1,451,968                    |       |
|                                                                                              |       |                                  |       |                         |       |
| Shareholders’ equity                                                                         |       |                                  |       |                         |       |
| Common stock: $2 par,  15,000,000 shares authorized,   9,781,070 and 9,766,336 shares outstanding |       | 19,562                                |       | 19,533                       |       |
|                                                                                              |       |                                  |       |                         |       |
| Additional paid-in  capital                                                                       |       | 71,052                                |       | 70,700                       |       |
|                                                                                              |       |                                  |       |                         |       |
| Retained earnings                                                                                 |       | 82,080                                |       | 78,158                       |       |
|                                                                                              |       |                                  |       |                         |       |
| Accumulated other  comprehensive loss                                                             |       | (377                                  | )          | (370                         | )          |
|                                                                                              |       |                                  |       |                         |       |
| Total shareholders’  equity                                                                  |       | 172,317                               |       | 168,021                      |       |
|                                                                                              |       |                                  |       |                         |       |
| Total liabilities and  shareholders’ equity                                                  |       | $                                     | 1,608,240  |                         | $          | 1,619,989 |   |
|                                                                                              |       |                                  |       |                         |       |

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* Condensed fromaudited consolidated financial statements.

See accompanying notes.

2

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**GREENE COUNTYBANCSHARES, INC.****CONDENSED CONSOLIDATED STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOMEThree Months Ended March 31, 2006 and 2005(Amounts in thousands, except share and per share data)**

** **

| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(Unaudited)**                                  | ** ** |
|                                                 |       |                                             |       |   |   |
| Interest income                                      |       |                                             |       |   |   |
| Interest and fees on loans                           |       | $                                                | 26,100     |   | $ | 18,079 |   |
| Investment securities                                |       | 631                                              |       | 473 |   |
| Federal funds sold and other                         |       | 36                                               |       | 183 |   |
|                                                 |       | 26,767                                           |       | 18,735 |   |
|                                                 |       |                                             |       |   |   |
| Interest expense                                     |       |                                             |       |   |   |
| Deposits                                             |       | 8,042                                            |       | 4,262 |   |
| Borrowings                                           |       | 1,539                                            |       | 1,146 |   |
|                                                 |       | 9,581                                            |       | 5,408 |   |
|                                                 |       |                                             |       |   |   |
| Net interest  income                                 |       | 17,186                                           |       | 13,327 |   |
|                                                 |       |                                             |       |   |   |
| Provision for  loan losses                           |       | 1,064                                            |       | 1,622 |   |
|                                                 |       |                                             |       |   |   |
| Net interest  income after provision for loan losses |       | 16,122                                           |       | 11,705 |   |
|                                                 |       |                                             |       |   |   |
| Noninterest income                                   |       |                                             |       |   |   |
| Service charges and fees                             |       | 3,231                                            |       | 2,142 |   |
| Other                                                |       | 1,524                                            |       | 1,034 |   |
|                                                 |       | 4,755                                            |       | 3,176 |   |
|                                                 |       |                                             |       |   |   |
| Noninterest expense                                  |       |                                             |       |   |   |
| Salaries and employee benefits                       |       | 6,391                                            |       | 5,245 |   |
| Occupancy and furniture and equipment expense        |       | 2,059                                            |       | 1,739 |   |
| Other                                                |       | 4,256                                            |       | 3,291 |   |
|                                                 |       | 12,706                                           |       | 10,275 |   |
|                                                 |       |                                             |       |   |   |
| Income before  income taxes                          |       | 8,171                                            |       | 4,606 |   |
|                                                 |       |                                             |       |   |   |
| Provision for  income taxes                          |       | 3,075                                            |       | 1,671 |   |
|                                                 |       |                                             |       |   |   |
| Net income                                           |       | $                                                | 5,096      |   | $ | 2,935 |   |
|                                                 |       |                                             |       |   |   |
| Comprehensive  income                                |       | $                                                | 5,089      |   | $ | 2,822 |   |
|                                                 |       |                                             |       |   |   |
| Per share of common  stock:                          |       |                                             |       |   |   |
| Basic earnings                                       |       | $                                                | 0.52       |   | $ | 0.38 |   |
| Diluted earnings                                     |       | $                                                | 0.52       |   | $ | 0.38 |   |
| Dividends                                            |       | $                                                | 0.12       |   | $ | 0.12 |   |
|                                                 |       |                                             |       |   |   |
| Weighted average shares  outstanding:                |       |                                             |       |   |   |
| Basic                                                |       | 9,770,555                                        |       | 7,649,070 |   |
| Diluted                                              |       | 9,870,691                                        |       | 7,744,181 |   |
|                                                 |       |                                             |       |   |   |

 

See accompanying notes.

3

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**GREENECOUNTY BANCSHARES, INC.CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITYFor the Three Months Ended March 31, 2006**

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

 
| ** **                                                           | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Compre-  hensive  Income (Loss)** | ** ** | **Total  Share-  holders’  Equity** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                           | ** ** | **(Unaudited)**   | ** ** |
|                                                                 |       |              |       |                             |       |                   |       |                                                         |       |                                     |       |
| **Balance,  January 1, 2006**                                   |       | $                 | 19,533     |                             | $          | 70,700                 |       | $                                                            | 78,158     |                                     | $          | (370 | ) | $ | 168,021 |   |
|                                                                 |       |              |       |                             |       |                   |       |                                                         |       |                                     |       |
| Issuance of  14,734 shares under stock option plan    |       | 29                |       | 259                              |       | —                 |       | —                                                       |       | 288                                      |       |
| Effect of stock  option accounting                                   |       | —            |       | 93                               |       | —                 |       | —                                                       |       | 93                                       |       |
| Dividends paid  ($.12 per share)                                     |       | —            |       | —                           |       | (1,174                 | )          | —                                                       |       | (1,174                                   | )          |
| Comprehensive income:                                                |       |              |       |                             |       |                   |       |                                                         |       |                                     |       |
| Net income                                                           |       | —            |       | —                           |       | 5,096                  |       | —                                                       |       | 5,096                                    |       |
| Change in unrealized losses, net oftaxes                             |       | —            |       | —                           |       | —                 |       | (7                                                           | )          | (7                                       | )          |
| Total comprehensive income                                           |       |              |       |                             |       |                   |       |                                                         |       | 5,089                                    |       |
|                                                                 |       |              |       |                             |       |                   |       |                                                         |       |                                     |       |
| **Balance, March 31, 2006**                                     |       | $                 | 19,562     |                             | $          | 71,052                 |       | $                                                            | 82,080     |                                     | $          | (377 | ) | $ | 172,317 |   |

 

See accompanying notes.

4

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**GREENE COUNTYBANCSHARES, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Three Months Ended March 31, 2006 and 2005(Amounts in thousands, except share and per share data)**
| ** **                                                                                 | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                 | ** ** | **(Unaudited)**          | ** ** |
| ** **                                                                                 | ** ** | ** **               | ** ** | ** **               | ** ** |
| **Cash  flows from operating activities**                                                  | ** ** | ** **               | ** ** | ** **               | ** ** |
| Net income                                                                                 |       | $                        | 5,096      |                     | $          | 2,935 |   |
| Adjustments to reconcile net income to net cash  (used) provided from operating activities |       |                     |       |                     |       |
| Provision for loan losses                                                                  |       | 1,064                    |       | 1,622                    |       |
| Depreciation and amortization                                                              |       | 1,036                    |       | 875                      |       |
| Security amortization and accretion, net                                                   |       | (6                       | )          | (6                       | )          |
| Loss on sale of securities                                                                 |       | 8                        |       | —                   |       |
| FHLB stock dividends                                                                       |       | (81                      | )          | (61                      | )          |
| Net gain on sale of mortgage loans                                                         |       | (183                     | )          | (89                      | )          |
| Originations of mortgage loans held for sale                                               |       | (11,241                  | )          | (6,968                   | )          |
| Proceeds from sales of mortgage loans                                                      |       | 12,152                   |       | 6,255                    |       |
| Increase in cash surrender value of life insurance                                         |       | (209                     | )          | (153                     | )          |
| Net losses from sales of fixed assets                                                      |       | 4                        |       | 20                       |       |
| Stock compensation expense                                                                 |       | 93                       |       | —                   |       |
| Net gain on OREO and repossessed assets                                                    |       | (184                     | )          | (33                      | )          |
| Deferred tax benefit                                                                       |       | (390                     | )          | (489                     | )          |
| Net changes:                                                                               |       |                     |       |                     |       |
| Other assets                                                                               |       | (162                     | )          | (1,645                   | )          |
| Accrued interest payable and other liabilities                                             |       | 1,722                    |       | (2,497                   | )          |
|                                                                                       |       |                     |       |                     |       |
| Net cash (used) provided from operating activities                                         |       | 8,719                    |       | (234                     | )          |
|                                                                                       |       |                     |       |                     |       |
| **Cash  flows from investing activities**                                                  | ** ** | ** **               | ** ** | ** **               | ** ** |
| Purchase of securities available for sale                                                  |       | (1,000                   | )          | (14,763                  | )          |
| Proceeds from sale of securities available for sale                                        |       | 985                      |       | —                   |       |
| Proceeds from maturities of securities held for sale                                       |       | 4,559                    |       | 367                      |       |
| Proceeds from maturities of securities held to  maturity                                   |       | 330                      |       | 450                      |       |
| Purchase of life insurance                                                                 |       | (41                      | )          | (865                     | )          |
| Net change in loans                                                                        |       | (27,185                  | )          | (69,987                  | )          |
| Proceeds from sale of other real estate                                                    |       | 1,188                    |       | 522                      |       |
| Improvements to other real estate                                                          |       | (1                       | )          | —                   |       |
| Proceeds from sale of fixed assets and fixed asset  additions, net                         |       | —                   |       | 8                        |       |
| Premises and equipment expenditures                                                        |       | (2,895                   | )          | (714                     | )          |
| Net cash used in investing activities                                                      |       | (24,060                  | )          | (84,982                  | )          |
|                                                                                       |       |                     |       |                     |       |
| **Cash  flows from financing activities**                                                  | ** ** | ** **               | ** ** | ** **               | ** ** |
| Net change in deposits                                                                     |       | (10,140                  | )          | 76,292                   |       |
| Net change in repurchase agreements                                                        |       | 468                      |       | 1,249                    |       |
| Proceeds from notes payable                                                                |       | 143,200                  |       | 115,000                  |       |
| Repayments of notes payable                                                                |       | (151,294                 | )          | (105,035                 | )          |
| Dividends paid                                                                             |       | (1,174                   | )          | (918                     | )          |
| Proceeds from issuance of common stock                                                     |       | 288                      |       | 47                       |       |
|                                                                                       |       |                     |       |                     |       |
| Net cash (used) provided from financing activities                                         |       | (18,652                  | )          | 86,635                   |       |
|                                                                                       |       |                     |       |                     |       |
| **Net  change in cash and cash equivalents**                                               |       | (33,993                  | )          | 1,419                    |       |
|                                                                                       |       |                     |       |                     |       |
| Cash and cash  equivalents, beginning of year                                              |       | 74,523                   |       | 70,648                   |       |
|                                                                                       |       |                     |       |                     |       |
| **Cash  and cash equivalents, end of period**                                              |       | $                        | 40,530     |                     | $          | 72,067 |   |
|                                                                                       |       |                     |       |                     |       |
| **Supplemental  disclosures — cash and noncash**                                      | ** ** | ** **               | ** ** | ** **               | ** ** |
| Interest paid                                                                              |       | $                        | 9,777      |                     | $          | 5,386 |   |
| Income taxes paid                                                                          |       | 514                      |       | 870                      |       |
| Loans converted to other real estate                                                       |       | 1,386                    |       | 1,702                    |       |
| Unrealized loss  on available for sale securities, net of tax                              |       | (7                       | )          | (113                     | )          |

 

 

See accompanying notes.

5

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**GREENE COUNTY BANCSHARES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2006Unaudited(Amounts in thousands, except share and per share data)**

** **

**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 andArticle 10 of Regulation S-X as promulgated by the Securities and ExchangeCommission (“SEC”). Accordingly, they do not include all the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operatingresults for the three months ended March 31, 2006 are not necessarilyindicative of the results that may be expected for the year ending December 31,2006. For further information, refer to the consolidated financial statementsand notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005. Certain amounts from prior periodfinancial statements have been reclassified to conform to the current year’spresentation.

# **NOTE 2 —STOCK COMPENSATION**

Effective January 1,2006, the Company adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment,” (“SFAS No.123R”) which was issued by theFinancial Accounting Standards Board in December 2004. SFAS No. 123Rrevises SFAS No. 123 “Accounting for Stock Based Compensation (“SFAS 123”),”and supersedes APB No. 25, “Accounting for Stock Issued to Employees,”(APB No. 25) and its related interpretations. SFAS No.123R  requires recognition of the cost of employeeservices received in exchange for an award of equity  instruments in the  financial  statements over the  period the employee  is  required to perform  the  services in exchange for the award  (presumptively  the vesting period). SFAS No. 123R alsorequires measurement of the cost of employee services received in exchange foran award based on the grant-date fair value of the award. SFAS No. 123Ralso amends SFAS No. 95 “Statement of Cash Flows,” to require that excesstax benefits be reported as financing cash inflows, rather than as a reductionof taxes paid, which is included within operating cash flows.

The Company adopted SFAS No. 123Rusing the modified prospective application as permitted under SFAS No. 123R.Accordingly, prior period amounts have not been restated. Under thisapplication, the Company is required to record compensation expense for allawards granted after the date of adoption and for the unvested portion ofpreviously granted awards that remain outstanding at the date of adoption.

Prior to the adoption ofSFAS No. 123R, the Company used the intrinsic value method as prescribedby APB No. 25 and thus recognized no compensation expense for optionsgranted with exercise prices equal to the fair market value of the Company’scommon stock on the date of grant.

The Company maintains a 2004Long-Term Incentive Plan, whereby a maximum of 500,000 shares of common stockmay be issued to directors and employees of the Company and the Bank. The Planprovides for 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 typically grantedat exercise prices equal to the fair market value of the Company’s common stockon the date of grant and typically have terms of ten years and vest at anannual rate of 20%. At March 31, 2006, 338,511 shares remained availablefor future grant. The compensation cost that has been charged against incomefor this plan was approximately $93,000 for the three months ended March 31,2006.

The fair market value ofeach option award is estimated on the date of grant using the Black-Scholesoption pricing model. The Company granted 90,261 and 71,228 of stock optionsfor the quarters ended March 31, 2006 and 2005, respectively, with a fairvalue of $8.90 and $7.12, respectively, for each option.

6

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#  

# **Note 2 —Stock Compensation**(Continued)

The risk-free interestrate is based upon a U.S. Treasury instrument with a life that is similar tothe expected life of the option grant. Expected volatility is based upon thehistorical volatility of the Company’s common stock based upon prior yearstrading history. The expected term of the options is based upon the averagelife of previously issued stock options. The expected dividend yield is basedupon current yield on date of grant. No post-vesting restrictions exist forthese options. The following table illustrates the assumptions for theBlack-Scholes model used in determining the fair value of options granted to employeesin the quarters presented.

 

|                          | ** ** | **Quarter  Ended  March 31,  2006** | ** ** | **Quarter  Ended  March 31,  2005** | ** ** |
|--------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| Risk-free  interest rate |       | 4.57                                     | %          | 4.20                                     | %          |
| Volatility               |       | 28.16                                    | %          | 23.30                                    | %          |
| Expected life            |       | 8 years                                  |       | 8 years                                  |       |
| Dividend yield           |       | 2.3                                      | %          | 2.3                                      | %          |
|                     |       |                                     |       |                                     |       |

 

A summary of optionactivity under the stock option plan as of March 31, 2006 and changesduring the three month period ended March 31, 2006 is presented below:
| ** **                                  | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------------|------------|-------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  beginning of year           |       | 396,910     |       | $                                      | 21.65      |                                                |       |                            |       |   |
| Granted                                     |       | 90,261      |       | 28.90                                  |       |                                                |       |                            |       |
| Exercised                                   |       | (14,734     | )          | 19.55                                  |       |                                                |       |                            |       |
| Forfeited                                   |       | (2,352      | )          | 24.54                                  |       |                                                |       |                            |       |
|                                        |       |        |       |                                   |       |                                                |       |                            |       |
| Outstanding at  March 31, 2006         |       | 470,085     |       | $                                      | 23.09      |                                                | 6.6 years  |                            | $          | 2,990 |   |
|                                        |       |        |       |                                   |       |                                                |       |                            |       |
| Options  exercisable at March 31, 2006 |       | 281,259     |       | $                                      | 21.02      |                                                | 5.0 years  |                            | $          | 2,417 |   |
|                                        |       |        |       |                                   |       |                                                |       |                            |       |

 

The total aggregateintrinsic value of options (which is the amount by which the stock priceexceeded the exercise price of the options on the date of exercise) exercisedduring the three months ended March 31, 2006 and 2005, was $134 and $38,respectively. The total fair value of shares vesting during the three monthsended March 31, 2006 and 2005, was $93 and $148, respectively. As of March 31,2006, there was $1,414 of total unrecognized compensation cost related tonon-vested share-based compensation arrangements, which is expected to berecognized over a weighted-average period of 2.7 years.

During the three monthsended March 31, 2006, the amount of cash received from the exercise ofstock options was $288.

 

7

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**NOTE2 — STOCK COMPENSATION (Continued)**

The adoption of SFAS No. 123Rand its fair value compensation cost recognition provisions are different fromthe nonrecognition provisions under SFAS No. 123 and the intrinsic valuemethod for compensation cost allowed by APB 25. The effect(increase/(decrease))of the adoption of SFAS No. 123R is as follows:

 
| ** **                        | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------|------------|
|                              |       |                                                       |       |
| Income before  income tax expense |       | $                                                          | (93        | ) |
| Net income                        |       | $                                                          | (93        | ) |
|                              |       |                                                       |       |
| Basic earnings per common share   |       | $                                                          | (0.01      | ) |
| Diluted earnings per share        |       | $                                                          | (0.00      | ) |
|                              |       |                                                       |       |

 

The following illustratesthe effect on net income available to common shareholders if the Company hadapplied the fair value recognition provisions of SFAS No. 123 to the prioryears quarter ended March 31, 2005:

 
| ** **                                                                                                          | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                                                                                                |       |                                                       |       |
| Net income:                                                                                                         |       |                                                       |       |
| As reported                                                                                                         |       | $                                                          | 2,935      |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax effects         |       | 5                                                          |       |
| Deduct: Total stock-based compensation expense  determined under fair value-based method for all awards, net of tax |       | (90                                                        | )          |
|                                                                                                                |       |                                                       |       |
| Pro forma                                                                                                           |       | $                                                          | 2,850      |   |
|                                                                                                                |       |                                                       |       |
| Earnings per common  share:                                                                                         |       |                                                       |       |
| As reported                                                                                                         |       | $                                                          | 0.38       |   |
| Pro forma                                                                                                           |       | $                                                          | 0.37       |   |
|                                                                                                                |       |                                                       |       |
| Diluted earnings per  common share:                                                                                 |       |                                                       |       |
| As reported                                                                                                         |       | $                                                          | 0.38       |   |
| Pro forma                                                                                                           |       | $                                                          | 0.37       |   |

 

8

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# **NOTE 3 — LOANS**

Loans at March 31,2006 and December 31, 2005 were as follows:
| ** **                       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                             |       |                     |       |                        |       |
| Commercial                       |       | $                        | 253,935    |                        | $          | 245,285 |   |
| Commercial real  estate          |       | 766,361                  |       | 729,254                     |       |
| Residential real  estate         |       | 305,951                  |       | 319,797                     |       |
| Consumer                         |       | 86,750                   |       | 90,682                      |       |
| Other                            |       | 1,915                    |       | 3,476                       |       |
| Unearned  interest               |       | (10,285                  | )          | (9,852                      | )          |
| Loans, net of  unearned interest |       | $                        | 1,404,627  |                        | $          | 1,378,642 |   |
|                             |       |                     |       |                        |       |
| Allowance for  loan losses       |       | $                        | (20,083    | )                           | $          | (19,739 | ) |
|                             |       |                     |       |                        |       |

 

Transactionsin the allowance for loan losses and certain information about nonaccrual loansand loans 90 days past due but still accruing interest for the three monthsended March 31, 2006 and twelve months ended December 31, 2005 wereas follows:
| ** **                      | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                            |       |                     |       |                        |       |
| Balance at  beginning of year   |       | $                        | 19,739     |                        | $          | 15,721 |   |
| Add (deduct):                   |       |                     |       |                        |       |
| Reserve acquired in acquisition |       | —                   |       | 1,467                       |       |
| Provision                       |       | 1,064                    |       | 6,365                       |       |
| Loans charged off               |       | (1,023                   | )          | (5,583                      | )          |
| Recoveries of loans charged off |       | 303                      |       | 1,769                       |       |
| Ending balance                  |       | $                        | 20,083     |                        | $          | 19,739 |   |
|                            |       |                     |       |                        |       |

 
| ** **                               | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                     |       |                     |       |                        |       |
| Loans past due  90 days still on accrual |       | $                        | 74         |                        | $          | 809 |   |
| Nonaccrual loans                         |       | 4,882                    |       | 5,915                       |       |
| Total                                    |       | $                        | 4,956      |                        | $          | 6,724 |   |
|                                     |       |                     |       |                        |       |

 

9

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

Basic earnings per share(EPS) of common stock is computed by dividing net income by the weightedaverage number of common shares outstanding during the period. Diluted earningsper share of common stock is computed by dividing net income by the weightedaverage number of common shares and potential common shares outstanding duringthe period. Stock options are regarded as potential common shares. Potentialcommon shares are computed using the treasury stock method. For the threemonths ended March 31, 2006, 150,446 options are excluded from the effectof dilutive securities because they are anti-dilutive; 60,185 options aresimilarly excluded from the effect of dilutive securities for the three monthsended March 31, 2005.

The following is areconciliation of the numerators and denominators used in the basic and dilutedearnings per share computations for the three months ended March 31, 2006and 2005:

 
| ** **                                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **Income  (Numerator)**               | ** ** | **Shares  (Denominator)** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** |
|                                                              |       |                                  |       |   |   |   |   |   |   |
| **Basic EPS**                                                     | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income available to common shareholders                           |       | $5,096                                |       | 9,770,555 |   | $2,935 |   | 7,649,070 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |
| **Effect of dilutive securities**                                 | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock options outstanding                                         |       | —                                |       | 100,136 |   | — |   | 95,111 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |
| **Diluted EPS**                                                   | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                              |       |                                  |       |   |   |   |   |   |   |
| Income available to common shareholders plus assumed  conversions |       | $5,096                                |       | 9,870,691 |   | $2,935 |   | 7,744,181 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |

 

10

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# **NOTE 5 — SEGMENT INFORMATION**

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

Segmentperformance is evaluated using net interest income and noninterest income.Income taxes are allocated based on income before income taxes, and indirectexpenses (includes management fees) are allocated based on time spent for eachsegment. Transactions among segments are made at fair value. Informationreported internally for performance assessment follows.

 
| **Three months ended March 31, 2006** | ** ** | **Bank**   | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                                           |       |       |       |                |       |                 |       |             |       |       |       |
| Net interest  income                                           |       | $          | 16,016     |                | $          | 1,429                |       | $                | (259       | )          | $          | — |   | $ | 17,186 |   |
| Provision for  loan losses                                     |       | 842        |       | 222                 |       | —               |       | —           |       | 1,064      |       |
| Noninterest  income                                            |       | 4,330      |       | 449                 |       | 197                  |       | (221             | )          | 4,755      |       |
| Noninterest  expense                                           |       | 11,699     |       | 1,111               |       | 117                  |       | (221             | )          | 12,706     |       |
| Income tax  expense                                            |       | 2,992      |       | 214                 |       | (131                 | )          | —           |       | 3,075      |       |
| **Segment profit**                                             |       | $          | 4,813      |                | $          | 331                  |       | $                | (48        | )          | $          | — |   | $ | 5,096 |   |
|                                                           |       |       |       |                |       |                 |       |             |       |       |       |
| **Segment  assets at March 31, 2006**                     |       | $          | 1,573,020  |                | $          | 30,525               |       | $                | 4,695      |       | $          | — |   | $ | 1,608,240 |   |
| ** **                                                     | ** ** | ** ** | ** ** | ** **          | ** ** | ** **           | ** ** | ** **       | ** ** | ** ** | ** ** |

 
| **Three months ended March 31, 2005** | ** ** | **Bank** | ** ** | **Other   Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|---------------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                                           |       |     |       |                      |       |                 |       |             |       |       |       |
| Net interest  income                                           |       | $        | 11,989     |                      | $          | 1,477                |       | $                | (139       | )          | $          | — |   | $ | 13,327 |   |
| Provision for  loan losses                                     |       | 1,289    |       | 333                       |       | —               |       | —           |       | 1,622      |       |
| Noninterest  income                                            |       | 2,780    |       | 402                       |       | 183                  |       | (189             | )          | 3,176      |       |
| Noninterest  expense                                           |       | 9,238    |       | 1,098                     |       | 128                  |       | (189             | )          | 10,275     |       |
| Income tax  expense                                            |       | 1,577    |       | 176                       |       | (82                  | )          | —           |       | 1,671      |       |
| **Segment  profit**                                            |       | $        | 2,665      |                      | $          | 272                  |       | $                | (2         | )          | $          | — |   | $ | 2,935 |   |
|                                                           |       |     |       |                      |       |                 |       |             |       |       |       |
| **Segment  assets at March 31, 2005**                     |       | $        | 1,287,067  |                      | $          | 31,193               |       | $                | 2,103      |       | $          | — |   | $ | 1,320,363 |   |
|                                                           |       |     |       |                      |       |                 |       |             |       |       |       |

 

11

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**NOTE 5 — SEGMENT INFORMATION**(Continued)

**Asset Quality Ratios**
| **As of and for the period ended March 31, 2006** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                                                                           |       |     |       |      |       |      |       |
| Nonperforming  loans as a percentage of total loans                                            |       | 0.33     | %          | 1.11      | %          | 0.35      | %          |
| Nonperforming  assets as a percentage of total assets                                          |       | 0.46     | %          | 1.68      | %          | 0.49      | %          |
| Allowance for  loan losses as a percentage of total loans                                      |       | 1.26     | %          | 7.94      | %          | 1.43      | %          |
| Allowance for  loan losses as a percentage of nonperforming assets                             |       | 239.12   | %          | 420.17    | %          | 252.55    | %          |
| Annualized net  charge-offs to average total loans, net of unearned interest                   |       | 0.15     | %          | 2.59      | %          | 0.21      | %          |
|                                                                                           |       |     |       |      |       |      |       |

 
| **As of and for the period ended March 31, 2005** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                                                                           |       |     |       |      |       |      |       |
| Nonperforming  loans as a percentage of total loans                                            |       | 0.52     | %          | 2.17      | %          | 0.58      | %          |
| Nonperforming  assets as a percentage of total assets                                          |       | 0.61     | %          | 2.60      | %          | 0.67      | %          |
| Allowance for  loan losses as a percentage of total loans                                      |       | 1.27     | %          | 7.76      | %          | 1.49      | %          |
| Allowance for  loan losses as a percentage of nonperforming assets                             |       | 176.73   | %          | 282.32    | %          | 187.12    | %          |
| Annualized net  charge-offs to average total loans, net of unearned interest                   |       | 0.16     | %          | 4.35      | %          | 0.29      | %          |
|                                                                                           |       |     |       |      |       |      |       |

 
| **As of and for the year ended December 31, 2005** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                                                                            |       |     |       |      |       |      |       |
| Nonperforming  loans as a percentage of total loans                                             |       | 0.45     | %          | 1.68      | %          | 0.49      | %          |
| Nonperforming  assets as a percentage of total assets                                           |       | 0.59     | %          | 2.37      | %          | 0.65      | %          |
| Allowance for  loan losses as a percentage of total loans                                       |       | 1.26     | %          | 7.89      | %          | 1.43      | %          |
| Allowance for  loan losses as a percentage of nonperforming assets                              |       | 180.06   | %          | 282.74    | %          | 188.58    | %          |
| Net charge-offs to  average total loans, net of unearned interest                               |       | 0.21     | %          | 4.22      | %          | 0.32      | %          |

#  

**NOTE 6 — REVOLVING CREDITAGREEMENT**

On August 30, 2005,the Company entered into a revolving credit agreement with SunTrust Bankpursuant to which SunTrust agreed to loan the Company up to $35,000, with thisamount being reduced to $15,000 after November 30, 2005. SunTrust’sobligation to make advances to the Company under the credit agreementterminates on August 29, 2006, unless the loan is extended or earlierterminated. The fee for maintaining this credit agreement is 0.15% per annum onthe unused portion of the commitment.

 

12

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**ITEM 2.**                 MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Forward-LookingStatements**

This QuarterlyReport on Form 10-Q contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. Forward-looking statements, which arebased on assumptions and estimates and describe our future plans, strategiesand 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 statements reflect the Company’s good faith beliefbased on current expectations, estimates and projections, they are subject torisks, uncertainties and assumptions and are not guarantees of futureperformance. Important factors that could cause actual results to differmaterially from the forward-looking statements we make in this Quarterly Reporton Form 10-Q include, but are not limited to, the following:

·                                          the Company’spotential growth, including its entrance or expansion into new markets, and theneed for sufficient capital to support that growth;

·                                          the Company’sability to successfully integrate the operations of any branches or banksacquired by it and to retain the customers of any such acquired branch or bank;

·                                          changes inthe 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;

·                                          changes ininterest rates, yield curves and interest rate spread relationships;

·                                           the strengthof the economies in the Company’s target market areas, as well as generaleconomic, market or business conditions;

·              changes in demand for loanproducts and financial services;

·              increased competition or marketconcentration;

·              concentration of credit exposure;

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

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

If one or more ofthese risks or uncertainties materialize, or if any of the Company’s underlyingassumptions prove incorrect, the Company’s actual results, performance orachievements may vary materially from future results, performance orachievements expressed or implied by these forward-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 and to the more detailed risk factors included in the Company’s AnnualReport on Form 10-K. The Company does not intend to and assumes noresponsibility for updating or revising any forward-looking statementscontained in or incorporated by reference into this Quarterly Report on Form 10-Q,whether as a result of new information, future events or otherwise.

13

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**Presentation of Amounts**

**Alldollar amounts set forth below, other than per-share amounts, are in thousandsunless otherwise noted.**

**General**

Greene CountyBancshares, Inc. (the “Company”) is the bank holding company for GreeneCounty Bank (the “Bank”), a Tennessee-chartered commercial bank that conductsthe principal business of the Company. The Company is the third largest bankholding company headquartered in Tennessee. The Bank currently maintains a mainoffice in Greeneville, Tennessee and 49 full-service bank branches primarily inEast and Middle Tennessee. In addition to its commercial banking operations,the Bank conducts separate businesses through its three wholly-ownedsubsidiaries: Superior Financial Services, Inc. (“Superior Financial”), aconsumer finance company; GCB Acceptance Corporation (“GCB Acceptance”), asubprime automobile lending company; and Fairway Title Co., a title companyformed in 1998. The Bank also operates a mortgage banking operation which hasits main office in Knox County, Tennessee, and a trust and money managementfunction doing business as Presidents Trust from an office in Wilson County,Tennessee.

On November 21,2003, the Company entered the Middle Tennessee market by completing itsacquisition of Gallatin, Tennessee-based Independent Bankshares Corporation (“IBC”).IBC was the bank holding company for First Independent Bank, which had fouroffices in Gallatin and Hendersonville, Tennessee, in Sumner County, andRutherford Bank and Trust, with three offices in Murfreesboro and Smyrna,Tennessee in Rutherford County. First Independent Bank and Rutherford Bank andTrust were subsequently merged with the Bank, with the Bank as the survivingentity.

On November 15,2004 the Company established banking operations in Nashville, Tennessee, withthe opening of its first full-service branch of Middle Tennessee Bank &Trust, which, like all of the Bank’s bank brands, operates within the Bank’sstructure. This new branch in Davidson County, Tennessee expanded the Company’spresence in the Middle Tennessee market and helped fill in the market betweenSumner and Rutherford Counties. At March 31, 2006, the Bank had threeMiddle Tennessee Bank & Trust branches in the Nashville area.

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

On December 10,2004 the Company purchased three full-service branches from National Bank ofCommerce located in Lawrence County Tennessee. This purchase (“NBC transaction”)added to the Bank’s presence in Middle Tennessee.

On October 7,2005, the Company purchased five bank branches in Montgomery County, Tennessee.This purchase (the “Clarksville transaction”) also adds to the Bank’s presencein Middle Tennessee.

**Growthand Business Strategy**

The Company expects that, over the intermediate term, its growth frommergers and acquisitions, including acquisitions of both entire financialinstitutions and selected branches of financial institutions, will continue. Denovo branching is also expected to be a method of growth, particularly inhigh-growth and other demographically-desirable markets.

The Company’s strategic plan outlines geographic expansion within a 300-mileradius of its headquarters in Greene County, Tennessee. This could result inthe Company expanding westward and eastward up to and including Nashville,Tennessee and Roanoke, Virginia, respectively, east/southeast up to andincluding the Piedmont area of North Carolina and western North Carolina,southward to northern Georgia and northward into eastern and central Kentucky.In particular, the Company believes the markets in and around Knoxville,Nashville and Chattanooga, Tennessee are highly desirable areas with respect toexpansion and growth plans.

14

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While the Bank operatesunder a single bank charter, it conducts business under 18 bank brands with adistinct community-based brand in almost every market. The Bank offers localdecision making through the presence of its regional executives in each of itsmarkets, while at the same time maintaining a cost effective organizationalstructure in its back office and support areas.

The Bank focusesits lending efforts predominately on individuals and small to medium-sizedbusinesses while it generates deposits primarily from individuals in its localcommunities. To aid in deposit generation efforts, the Bank offers itscustomers extended hours of operation during the week as well as Saturdaybanking. The Bank also offers free online banking and in the beginning of 2005established its High Performance Checking Program which it believes will allowit to continue to generate a significant number of core transaction accountswith significant balances.

Inaddition to the Company’s business model, which is summarized in the paragraphsabove, the Company is continuously investigating and analyzing other lines andareas of business. These include, but are not limited to, various types ofinsurance and real estate activities. Conversely, the Company frequentlyevaluates and analyzes the profitability, risk factors and viability of itsvarious business lines and segments and, depending upon the results of theseevaluations and analyses, may conclude to exit certain segments and/or businesslines. Further, in conjunction with these ongoing evaluations and analyses, theCompany may decide to sell, merge or close certain branch facilities.

**Overview**

TheCompany’s results of operations for the first quarter ended March 31,2006, compared to the same period in 2005, reflected an increase in netinterest income due primarily to organic loan growth, higher interest rates asa result of actions from the Federal Open Market Committee (“FOMC”) and theCompany’s continued expansion initiatives, including the Clarksvilletransaction in the fourth quarter of 2005. This increase in net interest incomewas offset, in part, by increases in noninterest expense from Company’sexpansion initiatives.

The Company’sprovision for loan losses decreased in the quarter ended March 31, 2006 ascompared to the same period in 2005. The decrease is primarily the result ofimproved credit quality.

At March 31,2006, the Company had total consolidated assets of approximately $1,608,240,total consolidated deposits of approximately $1,285,738, total consolidatedloans, net of unearned interest, of approximately $1,404,627 and totalconsolidated shareholders’ equity of approximately $172,317. The Company’sannualized return on average shareholders’ equity for the three months ended March 31,2006 was 11.86%, and its annualized return on average total assets was 1.27%The Company expects that its total assets, total consolidated deposits, totalconsolidated loans, net of unearned interest and total shareholders’ equitywill continue to increase over the remainder of 2006 as a result of itsexpansion efforts, including its branch expansions in the Middle Tennessee,Knoxville, and Clarksville markets.

**CriticalAccounting Policies and Estimates**

The Company’sconsolidated financial statements and accompanying notes have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities, the disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenue andexpenses during the reported periods.

Managementcontinually evaluates the Company’s accounting policies and estimates it usesto prepare the consolidated financial statements. 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 then existing facts and circumstances. Actual resultscould differ from those estimates made by management.

The Company believes its critical accounting policies and estimatesinclude the valuation of the allowance for loan losses and the fair value offinancial instruments and other accounts. Basedon management’s calculation, an allowance of $20,083, or 1.43%, of total loans,net of unearned interest, was an adequate estimate of losses inherent in theloan portfolio as of March 31, 2006. This estimate resulted in a provisionfor loan losses on the income statement of $1,064 during the first quarter of2006. If the economic conditions, loan mix and amount of future charge-off

15

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percentagesdiffer significantly from those assumptions used by management in making itsdetermination, the allowance for loan losses and provision for loan losses onthe income statement could be materially affected.

The consolidated financial statements  include certain  accounting  and disclosures  that require  management to makeestimates about fair values. Estimates of fair value are used in the accountingfor securities available for sale, loans held for sale, goodwill, otherintangible assets, and acquisition purchase accounting adjustments. Estimatesof fair 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 other assumptions such  as  interest rates,  credit risk, prepaymentsand other factors. The fair values of financial instruments are subject tochange as influenced by market conditions.

**Changes in Results ofOperations**

**NetIncome.**Net income for the three months ended March 31,2006 was $5,096, as compared to $2,935 for the same period in 2005. Thisincrease of $2,161, or 73.63%, resulted primarily from a $3,859, or 28.96%,increase in net interest income reflecting a higher level of interest-earningassets arising primarily from the Company’s expansion initiatives and higherinterest rates as a result of actions from the FOMC. Partially offsetting thisincrease was a $2,431, or 23.66%, increase in total non-interest expense from$10,275 for the three months ended March 31, 2005 to $12,706 for the sameperiod of 2006. This increase was also primarily attributable to the Company’sexpansion initiatives.

**NetInterest 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’s responsesto changes in interest rates through asset/liability management. During thethree months ended March 31, 2006, net interest income was $17,186, ascompared to $13,327 for the same period in 2005, representing an increase of28.96%.

The Company’s averagebalance for interest-earning assets increased 24.68% from $1,164,719 for thefirst quarter ended March 31, 2005 to $1,452,221 for the first quarterended March 31, 2006. The Company experienced a 28.98% growth in averageloan balances from $1,079,588 for the first quarter ended March 31, 2005to $1,392,401 for the first quarter ended March 31, 2006. The growth inloans can be attributed to the Company’s expansion initiatives, including theClarksville transaction, that occurred in the fourth quarter of 2005.

The Company’saverage balance for interest bearing liabilities increased 24.05% from$1,023,929 for the first quarter ended March 31, 2005 to $1,270,175 forthe first quarter ended March 31, 2006. The company experienced a 25.62%growth in average interest bearing deposits from $912,957 for the first quarterended March 31, 2005 to $1,146,868 for the first quarter ended March 31,2006. The company’s expansion initiatives, including Clarksville transaction,are the primary reasons for the growth in deposits.

The Company’syield on loans (the largest component of interest-earning assets) increase by81 basis points from the first quarter ended March 31, 2005 to the firstquarter ended March 31, 2006. The increase was primarily a result of theincreases by the FOMC in the discount rate as follows:

 
| **FMOC Meeting  Date** | ** ** | **Beginning  Rate** | ** ** | **Ending  Increase** | ** ** | **Rate** | ** ** |
|-----------------------------|------------|---------------------|------------|----------------------|------------|----------|------------|
| May 3, 2005            |       | 2.75                | %          | 0.25                 | %          | 3.00     | %          |
| June 30,  2005         |       | 3.00                | %          | 0.25                 | %          | 3.25     | %          |
| August 9,  2005        |       | 3.25                | %          | 0.25                 | %          | 3.50     | %          |
| September 20,  2005    |       | 3.50                | %          | 0.25                 | %          | 3.75     | %          |
| November 1,  2005      |       | 3.75                | %          | 0.25                 | %          | 4.00     | %          |
| December 13,  2005     |       | 4.00                | %          | 0.25                 | %          | 4.25     | %          |
| January 31,  2006      |       | 4.25                | %          | 0.25                 | %          | 4.50     | %          |
| March 28, 2006         |       | 4.50                | %          | 0.25                 | %          | 4.75     | %          |

 

The Company’s costof interest-bearing liabilities increased by 92 basis points from the firstquarter ended March 31, 2005 to the first quarter ended March 31,2006. The cost of raising deposits and other borrowed funds are

16

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influenced by both local market conditions as well asFOMC actions. Management believes that these costs were prudently managedduring the volatile interest rate cycle and the company was able to generallykeep rates in line.

The overall effectof these rate changes plus the economic benefit of increasing noninterestbearing funding sources by almost $25,000 was to increase the net interestmargin by 16 basis points from the first quarter ended March 31, 2005 tothe first quarter ended March 31, 2006.
| ** **                                                             | ** ** | **Three Months Ended  March  31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **Average  Balance**                                   | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** |
|                                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-earning  assets:**                                          | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans(1)                                                               |       | $                                                      | 1,392,401  |   | $ | 26,100 |   | 7.60 | % | $ | 1,079,588 |   | $ | 18,079 |   | 6.79 | % |
| Investment securities                                                  |       | 56,446                                                 |       | 631 |   | 4.53 | % | 51,004 |   | 473 |   | 3.76 | % |
| Other short-term investments                                           |       | 3,374                                                  |       | 36 |   | 4.33 | % | 34,127 |   | 183 |   | 2.17 | % |
| Total interest-earning assets                                          |       | $                                                      | 1,452,221  |   | $ | 26,767 |   | 7.48 | % | $ | 1,164,719 |   | $ | 18,735 |   | 6.52 | % |
| Noninterest earning assets                                             |       | 147,140                                                |       |   |   |   |   | 102,563 |   |   |   |   |   |
| Total assets                                                           |       | $                                                      | 1,599,361  |   |   |   |   |   | $ | 1,267,282 |   |   |   |   |   |
|                                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                                     | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits:                                                              |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Now accounts, money market and savings                                 |       | $                                                      | 520,821    |   | $ | 2,576 |   | 2.01 | % | $ | 388,983 |   | $ | 866 |   | 0.90 | % |
| Time deposits                                                          |       | 626,047                                                |       | 5,466 |   | 3.54 | % | 523,974 |   | 3,396 |   | 2.63 | % |
| Total interest-bearing deposits                                        |       | $                                                      | 1,146,868  |   | $ | 8,042 |   | 2.84 | % | $ | 912,957 |   | $ | 4,262 |   | 1.89 | % |
| Securities sold under repurchase agreements and  short-term borrowings |       | 21,678                                                 |       | 207 |   | 3.87 | % | 18,429 |   | 89 |   | 1.96 | % |
| Notes payable                                                          |       | 88,226                                                 |       | 1,090 |   | 5.01 | % | 82,233 |   | 918 |   | 4.53 | % |
| Subordinated debentures                                                |       | 13,403                                                 |       | 242 |   | 7.32 | % | 10,310 |   | 139 |   | 5.48 | % |
| Total interest-bearing liabilities                                     |       | $                                                      | 1,270,175  |   | $ | 9,581 |   | 3.06 | % | $ | 1,023,929 |   | $ | 5,408 |   | 2.14 | % |
|                                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Noninterest  bearing liabilities:**                                  | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Demand deposits                                                        |       | 140,044                                                |       |   |   |   |   | 116,854 |   |   |   |   |   |
| Other liabilities                                                      |       | 17,312                                                 |       |   |   |   |   | 15,544 |   |   |   |   |   |
| Total noninterest bearing liabilities                                  |       | 157,356                                                |       |   |   |   |   | 132,398 |   |   |   |   |   |
| Total liabilities                                                      |       | 1,427,531                                              |       |   |   |   |   | 1,156,327 |   |   |   |   |   |
| Shareholders’ equity                                              |       | 171,830                                                |       |   |   |   |   | 110,955 |   |   |   |   |   |
| Total liabilities and shareholders’ equity                        |       | $                                                      | 1,599,361  |   |   |   |   |   | $ | 1,267,282 |   |   |   |   |   |
|                                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                                   |       |                                                   |       | $ | 17,186 |   |   |   |   |   | $ | 13,327 |   |   |   |
|                                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate  spread                                                  |       |                                                   |       |   |   | 4.42 | % |   |   |   |   | 4.38 | % |
|                                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest-earning assets                                  |       |                                                   |       |   |   | 4.80 | % |   |   |   |   | 4.64 | % |

----

1 Average loan balances included nonaccrualloans. Interest income collected on nonaccrual loans has been included.

**Provisionfor Loan Losses.**During the three months ended March 31,2006, loan charge-offs were $1,023 and recoveries of charged-off loans were$303. The Company’s provision for loan losses decreased by $558, or 34.40%, to$1,064 for the three months ended March 31, 2006, as compared to $1,622for the same period in 2005. The Company’s allowance for loan losses increasedby $344 to $20,083 at March 31, 2006 from $19,739 at December 31,2005, while the ratio of the allowance for loan losses to total loans, net ofunearned interest, was 1.43% at both March 31, 2006 and December 31,2005, a decrease from the 1.49% at March 31, 2005. As of March 31,2006, most indicators of credit quality, as discussed below, have improvedcompared to December 31, 2005 and March 31, 2005. The ratio ofallowance for loan losses to nonperforming assets was 252.55%, 188.58% and187.12% at March 31, 2006, December 31, 2005 and March 31, 2005,respectively, and the ratio of nonperforming assets to total assets was 0.49%,0.65% and 0.67% at March 31, 2006, December 31, 2005 and March 31,2005, respectively. The ratio of nonperforming loans to total loans, net ofunearned interest, was 0.35%, 0.49% and 0.58% at March 31, 2006, December 31,2005 and March 31, 2005, respectively. Within the Bank, the Company’slargest

17

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subsidiary, the ratio of nonperforming assets to totalassets was 0.46%, 0.59% and 0.61% at March 31, 2006, December 31,2005 and March 31, 2005, respectively. At Superior Financial, the ratio ofnonperforming assets to total assets was 1.67%, 2.39% and 3.18% at March 31,2006, December 31, 2005 and March 31, 2005, respectively. At GCBAcceptance, the ratio of nonperforming assets to total assets was 2.38%,  3.48% and 2.23% at March 31, 2006, December 31,2005 and March 31, 2005, respectively.

The Company’sannualized net charge-offs for the three months ended March 31, 2006 were$2,880 compared to actual net charge-offs of $3,814 for the year ended December 31,2005. Annualized net charge-offs as apercentage of average loans improved from 0.29% for the three months ended March 31,2005 to 0.21% for the three months ended March 31, 2006. Net charge-offsas a percentage of average loans were 0.32% for the year ended December 31,2005. Within the Bank, annualized net charge-offs as a percentage ofaverage loans decreased slightly from 0.16% for the three months ended March 31,2005 to 0.15% for the same period in 2006. Net charge-offs within the Bank as apercentage of average loans were 0.21% for the year ended December 31,2005. Annualized net charge-offs in Superior Financial for the three monthsended March 31, 2006 were $172 compared to actual net charge-offs of $441for the year ended December 31, 2005. Annualized net charge-offs in theBank for the three months ended March 31, 2006 were $2,080 compared toactual net charge-offs of $2,490 for the year ended December 31, 2005.Annualized net charge-offs in GCB Acceptance for the three months ended March 31,2006 were $628 compared to actual net charge-offs of $883 for the year ended December 31,2005. At this point, management believes that total net charge-offs for 2006within the Bank and its subsidiaries will decline slightly compared to 2005based on an improving economy and asset quality trends.

Based on the Company’sallowance for loan loss calculation andreview of the loan portfolio, management believes the allowance for loan lossesis adequate at March 31, 2006.

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

Total noninterestincome for the three months ended March 31, 2006 was $4,755 as compared to$3,176 for the same period in 2005. Service charges, commissions and feesremain the largest component of total noninterest income and increased $1,089,or 50.84%, to $3,231 for the three months ended March 31, 2006 from $2,142for the same period in 2005. The increase reflects an increase in fees fromdeposit-related products resulting primarily from the Company’s success ingenerating new accounts from its High Performance Checking promotion and theCompany’s overall growth initiatives. In addition, other noninterest incomeincreased by $490, or 47.39%, to $1,524 for the three months ended March 31,2006 from $1,034 for the same period in 2005. The increase is primarilyattributable to increased fees from the sale of mutual funds and annuities,income from our check provider and a gain on the sale of foreclosed equipment.

**NoninterestExpense.**Control of noninterest expense also is an importantaspect in enhancing income. Noninterest expense includes personnel, occupancy,and other expenses such as data processing, printing and supplies, legal andprofessional fees, postage, Federal Deposit Insurance Corporation assessment,etc. Total noninterest expense was $12,706 for the three months ended March 31,2006 compared to $10,275 for the same period in 2005. The $2,431, or 23.66%,increase in total noninterest expense for the three months ended March 31,2006 compared to the same period of 2005 principally reflects increases in allexpense categories primarily as a result of the Company’s expansioninitiatives.

Personnel costs are thelargest component of the Company’s noninterest expenses. For the three monthsended March 31, 2006, salaries and benefits represented $6,391, or 50.30%,of total non-interest expense. This was an increase of $1,146, or 21.85%, from$5,245 for the three months ended March 31, 2005. Including Bank officesand non-Bank office locations, the Company had 60 locations at both March 31,2006 and December 31, 2005, as compared to 53 at March 31, 2005, andthe number of full-time equivalent employees increased 7.6% from 481 at March 31,2005 to 572 at March 31, 2006. These increases in personnel costs, numberof branches and employees are primarily the result of the Company’s expansioninitiatives.

Effective January 1, 2006, the Company adoptedSFAS No. 123R “Share-Based Payment.” SFAS No. 123R requiresrecognition of the cost of employee services received in exchange for an awardof equity incentives in the financial statements over the period the employeeis required to perform the services in exchange for the award (presumptivelythe vesting period). The Company adopted SFAS No. 123R using the modifiedprospective application as permitted under SFAS No. 123R. Accordingly,prior period amounts have not been restated. Under 

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this application, the Company is required to recordcompensation expense for all awards granted after the date of adoption and forthe unvested portion of previously granted awards that remain outstanding atthe date of adoption. Prior to the adoption of SFAS No. 123R, the Companyused the intrinsic value method as prescribed by APB No. 25 and thusrecognized no compensation expense for options granted with exercise pricesequal to the fair market value of the Company’s common stock on the date ofgrant. The compensation cost that was charged against income for our stockoption plans was $93 for the three months ended March 31, 2006. The amountof compensation cost that would have been recognized for the three months endedMarch 31, 2005 if SFAS No. 123R had been adopted was $148. The totalcompensation cost related to nonvested awards not yet recognized at March 31,2006 is $1,414 which will be recognized over the weighted average period ofapproximately 2.7 years. See “Note 2 — Stock Compensation” in the consolidatedfinancial statements for further information.

The Company’sefficiency ratio improved from 62.26% at March 31, 2005 to 57.55% at March 31,2006. The improvement in the efficiency ratio is a result of the higher levelof earnings generated given the current operating infrastructure in place inthe quarter ended March 31, 2006 versus the higher initial start up costsincurred in the quarter ended March 31, 2005 relating to the company’sHigh Performance Checking promotion plus the initial costs incurred inexpanding the company’s presence in Middle Tennessee. The efficiency ratioillustrates how much it cost the Company to generate revenue; for example, itcost the Company 57.55 cents to generate one dollar of revenue for the threemonths ended March 31, 2006.

**IncomeTaxes.**The effective income tax rate for the three monthsended March 31, 2006 was 37.63% compared to 36.28% for the same period in2005.

**Changesin Financial Condition Over Financial Reporting**

Total assets at March 31,2006 were $1,608,240, a decrease of $11,749, or .73%, from total assets of$1,619,989 at December 31, 2005. The decrease in assets resulted fromde-leveraging the balance sheet as the seasonal impact of the year-end build-upin deposit levels subsided during the quarter.

At March 31, 2006,loans, net of unearned interest, were $1,404,627 compared to $1,378,642 at December 31,2005, an increase of $25,985, or 1.88%, from December 31, 2005. Theincrease in loans during the first three months of 2006 primarily reflects anincrease in commercial real estate loans and commercial loans.

The Company maintains aninvestment portfolio to provide liquidity and earnings. Investments at March 31,2006 with an amortized cost of $47,968 had a market value of $47,314. Atyear-end 2005, investments with an amortized cost of $52,844 had a market valueof $52,202.

Non-performing loansinclude non-accrual loans and loans 90 or more days past due. All loans thatare 90 days past due are considered non-accrual unless they are adequatelysecured and there is reasonable assurance of full collection of principal andinterest. Non-accrual loans that are 120 days past due without assurance ofrepayment are charged off against the allowance for loan losses. Nonaccrual loans and loans past due 90 days andstill accruing decreased by $1,768, or 26.29%, during the three months ended March 31,2006 to $4,956. At March 31, 2006, the ratio of the Company’sallowance for loan losses to non-performing assets (which include non-accrualloans) was 252.55%.

**Liquidityand Capital Resources**

**Liquidity.**Liquidityrefers to the ability or the financial flexibility to manage future cash flowsto meet the needs of depositors and borrowers and fund operations. Maintainingappropriate levels of liquidity allows the Company to have sufficient fundsavailable for reserve requirements, customer demand for loans, withdrawal ofdeposit balances and maturities of deposits and other liabilities. The Company’sliquid assets include cash and due from banks, federal funds sold, investmentsecurities and loans held for sale. Including securities pledged tocollateralize municipal deposits, these assets represented 6.83% of the totalliquidity base at March 31, 2006, as compared to 9.49% at December 31,2005. The liquidity base is generally defined to include deposits, repurchaseagreements, notes payable and subordinated debentures. In addition, the Companymaintained borrowing availability with the Federal Home Loan Bank of Cincinnati(“FHLB”) of approximately $4,749 at March 31, 2006. The Company alsomaintains federal funds lines of credit totaling $116,000 at nine correspondentbanks of which

19

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$116,000 was available at March 31, 2006. TheCompany believes it has sufficient liquidity to satisfy its current operatingneeds.

On August 30, 2005the Company entered into a revolving credit agreement with SunTrust Bankpursuant to which SunTrust agreed to loan the Company up to $35,000 inconnection with the Clarksville transaction with this amount being reduced to$15,000 after November 30, 2005. SunTrust’s obligation to make advances tothe Company under the credit agreement terminates on August 29, 2006,unless the loan is extended or earlier terminated. The fee for maintaining thiscredit agreement is 0.15% per annum on the unused potion of this commitment.

For the threemonths ended March 31, 2006, operating activities of the Company provided$8,719 of cash flows. Net income of $5,096 comprised a substantial portion ofthe cash generated from operations. Cash flows from operating activities werealso positively affected by various non-cash items, including (i) $1,064in provision for loan losses, (ii) $1,036 of depreciation and amortizationand (iii) $1,722 increase in accrued interest payable and otherliabilities. In addition, the cash flows provided by the proceeds from sales ofmortgage loans exceeded the cash used by the originations of mortgage loansheld for sale by $728.

The Company’s netincrease in loans used $27,185 in cash flows and was the primary component ofthe $24,060 in net cash used in investing activities. In addition, the Companypurchased $1,000 in investment securities available for sale. Fixed assetadditions used $2,895 in cash flows. Offsetting these uses of cash was $5,544in proceeds from the sale and maturity of securities available for sale.

 The net decrease in deposits of $10,140 wasthe primary source of cash flows used in financing activities. Also providingcash from financing activities were the proceeds from notes payable of $143,200offset, in part, by repayments of notes payable of $151,294. In addition,dividends paid in the amount of $1,174 further reduced the total net cash usedin financing activities.

**CapitalResources.**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’s dailyoperations.

On September 25,2003, the Company issued $10,310 of subordinated debentures, as part of aprivately placed pool of trust preferred securities. The securities, due in2033, bear interest at a floating rate of 2.85% above the three-month LIBORrate, reset quarterly, and are callable in five years without penalty. TheCompany used the proceeds of the offering to support its acquisition of IBC,and the capital raised from the offering qualifies as Tier I capital forregulatory purposes.

On June 28,2005, the Company issued an additional $3,093 of subordinated debentures, aspart of a privately placed pool of trust preferred securities. The securities,due in 2035, bear interest at a floating rate of 1.68% above the three-monthLIBOR rate, reset quarterly, and are callable in five years from the date ofissuance without penalty. The Company used the proceeds to augment its capitalposition in connection with its significant asset growth, and the capitalraised from the offering qualifies as Tier 1 capital for regulatory purposes.

On September 28,2005, the Company consummated the sale of 1,833,043 shares of its common stockin a public offering in which it received proceeds, after deducting theunderwriting discount and the expenses of the offering, of approximately$44,100. The Company contributed approximately $35,000 of these net proceeds tothe Bank to provide capital for the Clarksville transaction. 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.

Shareholders’equity on March 31, 2006 was $172,317, an increase of $4,296, or 2.56%,from $168,021 on December 31, 2005. The increase in shareholders’ equityprimarily reflected net income for the three months ended March 31, 2006of $5,096 ($0.52 per share, assuming dilution). This increase was offset byquarterly dividend payments during the three months ended March 31, 2006totaling $1,174 ($0.12 per share).

20

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On September 18, 2002, the Company announced that its Board ofDirectors had authorized the repurchase of up to $2,000 of the Company’soutstanding shares of common stock beginning in October 2002. Therepurchase 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 and there is noguarantee as to the exact number of shares to be repurchased by the Company. Todate, the Company has purchased 25,700 shares at an aggregate cost ofapproximately $538 under this program which was renewed by the Company’s Boardof Directors on November 14, 2005. The repurchase program will terminateon the earlier to occur of the Company’s repurchase of the total authorizeddollar amount of the Company’s common stock or December 1, 2006.

The Company’s primarysource of liquidity is dividends paid by the Bank. Applicable Tennesseestatutes and regulations impose restrictions on the amount of dividends thatmay be declared by the Bank. Further, any dividend payments are subject to thecontinuing ability of the Bank to maintain its compliance with minimum federal regulatorycapital requirements and to retain its characterization under federalregulations as a “well-capitalized” institution.

Risk-based capitalregulations adopted by the Board of Governors of the Federal Reserve Board (“FRB”)and the Federal Deposit Insurance Corporation (the “FDIC”) require bank holdingcompanies and banks, respectively, to achieve and maintain specified ratios ofcapital to risk-weighted assets. The risk-based capital rules are 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 riskweights is applied to the different on-balance sheet items. Off-balance sheetitems, such as loan commitments, are also subject to risk-weighting afterconversion to balance sheet equivalent amounts. All bank holding companies andbanks must maintain a minimum total capital to total risk-weighted assets ratioof 8.00%, at least half of which must be in the form of core, or Tier 1,capital (consisting of shareholders’ equity, less goodwill and other intangibleassets and accumulated other comprehensive income). At March 31, 2006, theBank and the Company each satisfied their respective minimum regulatory capitalrequirements, and the Bank was “well-capitalized” within the meaning of federalregulatory requirements. 
| ** **                 | ** ** | **Required  Minimum  Ratio** | ** ** | **Bank** | ** ** | **Company** | ** ** |
|----------------------------|------------|------------------------------|------------|----------|------------|-------------|------------|
| Tier 1  risk-based capital |       | 4.00                         | %          | 10.28    | %          | 10.36       | %          |
| Total risk-based  capital  |       | 8.00                         | %          | 11.53    | %          | 11.61       | %          |
| Leverage Ratio             |       | 4.00                         | %          | 9.31     | %          | 9.38        | %          |

 

The FRB hasrecently issued regulations which will allow continued inclusion of outstandingand prospective issuances of trust preferred securities as Tier 1 capitalsubject to stricter quantitative and qualitative limits than allowed underprior regulations. The new limits will phase in over a five-year transitionperiod and would permit the Company’s trust preferred securities to continue tobe treated as Tier 1 capital.

**Off-Balance Sheet Arrangements**

At March 31, 2006, the Company had outstanding unused lines of credit and standby letters of credit totaling $583,593 and unfunded loan commitments outstanding of $44,943. 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 March 31, 2006, the Company had accommodations with upstream correspondent banks for unsecured Federal funds lines. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within less than a month. The following table presents additional information about the Company’s off-balance sheet commitments as of March 31, 2006, which by their terms have contractual maturity dates subsequent to March 31, 2006:

21

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| ** **                                 | ** ** | **Less than 1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than 5 Years** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------------------------|------------|-----------|------------|
| Commitments to  make loans — fixed    |       | $                                   | 6,828      |               | $          | —             |       | $                                    | —     |      | $          | — |   | $ | 6,828 |   |
| Commitments to  make loans — variable |       | 38,115                              |       | —             |       | —             |       | —                               |       | 38,115    |       |
| Unused lines of  credit                    |       | 368,440                             |       | 78,908             |       | 23,907             |       | 80,380                               |       | 551,635   |       |
| Letters of  credit                         |       | 15,300                              |       | 16,658             |       | —             |       | —                               |       | 31,958    |       |
| Total                                      |       | $                                   | 428,683    |               | $          | 95,566             |       | $                                    | 23,907     |      | $          | 80,380 |   | $ | 628,536 |   |

 

**Disclosure of ContractualObligations**

In the ordinary courseof operations, the Company enters into certain contractual obligations. Suchobligations include the funding of operations through debt issuances as well asleases for premises and equipment. The following table summarizes the Company’ssignificant fixed and determinable contractual obligations as of March 31,2006:
| ** **                          | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than 5 Years** | ** ** | **Total**  | ** ** |
|-------------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|--------------------------------------|------------|------------|------------|
| ** **                          | ** ** | ** **                      | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Deposits without  a stated maturity |       | $                               | 685,166    |               | $          | —             |       | $                                    | —     |       | $          | — |   | $ | 685,166 |   |
| Certificate of  deposits            |       | 452,149                         |       | 91,810             |       | 51,282             |       | 5,331                                |       | 600,572    |       |
| Repurchase  agreements              |       | 17,966                          |       | —             |       | —             |       | —                               |       | 17,966     |       |
| FHLB advances  and notes payable    |       | 31,187                          |       | 3,817              |       | 55,368             |       | 6,680                                |       | 97,052     |       |
| Subordinated  debentures            |       | —                          |       | —             |       | —             |       | 13,403                               |       | 13,403     |       |
| Operating lease  obligations        |       | 588                             |       | 803                |       | 223                |       | 108                                  |       | 1,722      |       |
| Deferred  compensation              |       | 509                             |       | 1,305              |       | —             |       | 966                                  |       | 2,780      |       |
| Purchase  obligations               |       | 149                             |       | —             |       | —             |       | —                               |       | 149        |       |
| Total                               |       | $                               | 1,187,714  |               | $          | 97,735             |       | $                                    | 106,873    |       | $          | 26,488 |   | $ | 1,418,810 |   |

 

Additionally, theCompany routinely enters into contracts for services. These contracts mayrequire payment for services to be provided in the future and may also containpenalty clauses for early termination of the contract. Management is not awareof any additional commitments or contingent liabilities which may have amaterial adverse impact on the liquidity or capital resources of the Company.

**Effect of New AccountingStandards**

In November 2005, the Financial AccountingStandards Board (FASB) issued Staff Position (FSP) FAS 115-1 and FAS 124-1,*the Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments,*which amendsSFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities,*and No. 124, *Accounting for Certain Investments Held byNot-for-Profit Organizations,* and APB Opinion No. 18, *The Equity Method of Accounting for Investments inCommon Stock.* This FSP addresses the determination as to when aninvestment is considered impaired, whether the impairment is other thantemporary, and the measurement of an impairment loss. FSP FAS 115-1 andFAS 124-1 also includes accounting considerations subsequent to therecognition of an other-than-temporary impairment and requires certaindisclosures about unrealized losses that have not been recognized asother-than-temporary impairments. The guidance in this FSP is effective for reportingperiods beginning after December 15, 2005. The adoption of FSP FAS 115-1and FAS 124-1 did not have a material impact on the Company’s  financial condition or results of operations.

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections.*Thisstatement replaces APB Opinion No. 20, *AccountingChanges*and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements.*SFAS No. 154changes the requirements for the accounting for and reporting of a voluntarychange in accounting principle. SFAS No. 154 requires retrospectiveapplication to prior periods for changes in accounting principles or errorcorrections, unless it is impractical to determine the period-specific effectsor when a pronouncement includes specific transition provisions. This Statementis effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. The adoption of SFAS No. 154(revised 2004) did not have a material impact on its financial condition orresults of operations of the Company.

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

Acomprehensive qualitative and quantitative analysis regarding market risk wasdisclosed in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005. No material changes in the assumptions used orresults obtained from the model have occurred since December 31, 2005.

Actual results for the year ending December 31, 2006 will differfrom simulated results due to timing, magnitude, and frequency of interest ratechanges, as well as changes in market conditions and management strategies.

**ITEM 4.**                    CONTROLS ANDPROCEDURES

**Evaluation ofDisclosure Controls and Procedures**

The Companymaintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934 (the “Exchange Act”), that aredesigned to ensure that information required to be disclosed by it in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms and 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. TheCompany carried out an evaluation, under the supervision and with theparticipation of its management, including its Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofits disclosure controls and procedures as of the end of the period covered bythis report. Based on the evaluation of these disclosure controls andprocedures, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures were effective.

**Changes inInternal Controls**

There were nochanges in the Company’s internal control over financial reporting during theCompany’s fiscal quarter ended March 31, 2006 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

**PART II -OTHER INFORMATION**

**Item 1.**                          LegalProceedings

The Company and its subsidiaries are subject to claims and suitsarising in the ordinary course of business. In the opinion of management, theultimate resolution of these pending claims and legal proceedings will not havea material adverse effect on the Company’s results of operations.

**Item 1A.**                 Risk Factors

Not applicable.

**Item 2.**                           Unregistered Sales of EquitySecurities and Use of Proceeds

The Company made no repurchases of its common stock during the quarterended March 31, 2006.

**Item 3.**                          Defaultsupon Senior Securities

None.

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

None

**Item 5.**                          OtherInformation

None.

**Item 6.**                          Exhibits

(a) Exhibits
|   | Exhibit No. 31.1 |   | Chief Executive Officer Certification Pursuant to  Rule 13a-14(a)/15d-14(a)                                                                           |
|--------|----------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                       |   |                                                                                                                                                       |
|   | Exhibit  No. 31.2     |   | Chief Financial Officer Certification Pursuant to  Rule 13a-14(a)/15d-14(a)                                                                           |
|   |                       |   |                                                                                                                                                       |
|   | Exhibit  No. 32.1     |   | Chief Executive Officer Certification Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   |                       |   |                                                                                                                                                       |
|   | Exhibit  No. 32.2     |   | Chief Financial Officer Certification Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   |                       |   |                                                                                                                                                       |

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** **

**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:  May 9, 2006 | By:    | /s/ R. Stan Puckett                               |   |
|                    |   | R. Stan Puckett                                   |   |
|                    |   | Chairman of the Board and Chief Executive Officer |   |
|                    |   | (Duly authorized representative)                  |   |
|                    |   |                                              |   |
| Date:  May 9, 2006 |   | /s/ James E. Adams                                |   |
|                    |   | James E. Adams                                    |   |
|                    |   | Senior Vice President, Chief Financial            |   |
|                    |   | Officer (Principal financial and accounting       |   |
|                    |   | officer) and Assistant Secretary                  |   |

 

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