Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One) 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2005
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________________ to ________________
 
Commission file number 0-14289
 
GREENE COUNTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
 
Tennessee
 
62-1222567
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
   
     
100 North Main Street, Greeneville, Tennessee 
 
37743-4992
(Address of principal executive offices)
 
(Zip Code)
     
Registrant's telephone number, including area code: (423) 639-5111
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x   NO o
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) YES x  NO o
 
As of July 29, 2005, the number of shares outstanding of the issuer’s common stock was: 7,651,016.
 
 

 
ITEM 1.
FINANCIAL STATEMENTS
 
The unaudited condensed consolidated financial statements of the Registrant and its wholly owned subsidiaries are as follows:

Condensed Consolidated Balance Sheets - June 30, 2005 and December 31, 2004.

Condensed Consolidated Statements of Income and Comprehensive Income - For the three and six months ended June 30, 2005 and 2004.

Condensed Consolidated Statement of Shareholders’ Equity - For the six months ended June 30, 2005.

Condensed Consolidated Statements of Cash Flows - For the six months ended June 30, 2005 and 2004.

Notes to Condensed Consolidated Financial Statements.
 
 
-2-

GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2005 and December 31, 2004
(Amounts in thousands, except share and per share data)

 
   
(Unaudited)
June 30,
2005
 
 
December 31,
2004*
 
 
ASSETS
         
           
Cash and due from banks
 
$
35,420
 
$
30,727
 
Federal funds sold
   
46,516
   
39,921
 
Securities available for sale
   
51,216
   
35,318
 
Securities held to maturity (with a market value of $3,503 and $4,506)
   
3,480
   
4,381
 
FHLB, Bankers Bank and other stock, at cost
   
6,339
   
6,211
 
Loans held for sale
   
1,057
   
1,151
 
Loans
   
1,158,644
   
1,046,867
 
Less: Allowance for loan losses
   
(16,880
)
 
(15,721
)
Net loans
   
1,141,764
   
1,031,146
 
Premises and equipment, net
   
35,373
   
35,591
 
Goodwill and other intangible assets
   
23,319
   
23,695
 
Other assets
   
29,710
   
25,262
 
Total assets
 
$
1,374,194
 
$
1,233,403
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
             
               
Liabilities
             
Deposits
 
$
1,148,434
 
$
998,022
 
Repurchase agreements
   
16,426
   
13,868
 
FHLB advances and notes payable
   
70,509
   
85,222
 
Subordinated debentures
   
13,403
   
10,310
 
Accrued interest payable and other liabilities
   
11,936
   
17,263
 
Total liabilities
   
1,260,708
   
1,124,685
 
               
Shareholders’ equity
             
Common stock: $2 par, 15,000,000 shares authorized, 7,651,016 and 7,647,740 shares outstanding
   
15,303
   
15,296
 
Additional paid-in capital
   
24,204
   
24,160
 
Retained earnings
   
74,101
   
69,289
 
Accumulated other comprehensive loss
   
(122
)
 
(27
)
Total shareholders’ equity
   
113,486
   
108,718
 
Total liabilities and shareholders’ equity
 
$
1,374,194
 
$
1,233,403
 
               
 

*    Condensed from audited consolidated financial statements.
             
               
See accompanying notes.

 
-3-

GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three and Six Months Ended June 30, 2005 and 2004
(Amounts in thousands, except share and per share data)

 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2005
 
2004
 
2005
 
2004
 
   
(Unaudited)
 
(Unaudited)
 
                   
Interest income
                 
Interest and fees on loans
 
$
19,851
 
$
15,522
 
$
37,930
 
$
31,047
 
Investment securities
   
592
   
339
   
1,065
   
725
 
Federal funds sold and interest-earning deposits
   
260
   
8
   
443
   
27
 
     
20,703
   
15,869
   
39,438
   
31,799
 
                           
Interest expense
                         
Deposits
   
5,501
   
3,006
   
9,763
   
6,192
 
Borrowings
   
1,130
   
880
   
2,276
   
1,744
 
     
6,631
   
3,886
   
12,039
   
7,936
 
                           
Net interest income
   
14,072
   
11,983
   
27,399
   
23,863
 
                           
Provision for loan losses
   
1,060
   
1,162
   
2,682
   
2,685
 
                           
Net interest income after provision for loan losses 
   
13,012
   
10,821
   
24,717
   
21,178
 
                           
Noninterest income
                         
Service charges and fees
   
2,836
   
2,518
   
4,978
   
4,913
 
Other
   
627
   
552
   
1,661
   
1,251
 
     
3,463
   
3,070
   
6,639
   
6,164
 
                           
Noninterest expense
                         
Salaries and employee benefits
   
5,099
   
4,464
   
10,344
   
9,171
 
Occupancy and furniture and equipment expense
   
1,774
   
1,462
   
3,513
   
2,951
 
Other
   
3,549
   
2,648
   
6,840
   
5,403
 
     
10,422
   
8,574
   
20,697
   
17,525
 
                           
Income before income taxes
   
6,053
   
5,317
   
10,659
   
9,817
 
                           
Provision for income taxes
   
2,339
   
2,042
   
4,010
   
3,690
 
                           
Net income
 
$
3,714
 
$
3,275
 
$
6,649
 
$
6,127
 
                           
Comprehensive income
 
$
3,732
 
$
2,935
 
$
6,554
 
$
5,808
 
                           
Per share of common stock:
                         
Basic earnings
 
$
0.49
 
$
0.43
 
$
0.87
 
$
0.80
 
Diluted earnings
 
$
0.48
 
$
0.42
 
$
0.86
 
$
0.79
 
Dividends
 
$
0.12
 
$
0.12
 
$
0.24
 
$
0.24
 
                           
Weighted average shares outstanding:
                         
Basic
   
7,650,884
   
7,656,832
   
7,649,982
   
7,661,593
 
Diluted
   
7,745,985
   
7,713,966
   
7,745,130
   
7,720,365
 
                           
See accompanying notes.


-4-

GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 2005
(Amounts in thousands, except share and per share data)

 
               
Accumulated
     
               
Other
 
Total
 
       
Additional
     
Compre-
 
Share-
 
   
Common
 
Paid-in
 
Retained
 
hensive
 
holders’
 
   
Stock
 
Capital
 
Earnings
 
Income (Loss)
 
Equity
 
   
(Unaudited)
 
                       
Balance, January 1, 2005
 
$
15,296
 
$
24,160
 
$
69,289
 
$
(27
)
$
108,718
 
                                 
Issuance of 3,276 shares under stock option plan
   
7
   
44
   
--
   
--
   
51
 
Dividends paid ($.24 per share)
   
--
   
--
   
(1,837
)
 
--
   
(1,837
)
Comprehensive income:
                               
Net income
   
--
   
--
   
6,649
   
--
   
6,649
 
Change in unrealized gains
(losses), net of taxes
   
--
   
--
   
--
   
(95
)
 
(95
)
Total comprehensive income
                           
6,554
 
Balance, June 30, 2005
 
$
15,303
 
$
24,204
 
$
74,101
 
$
(122
)
$
113,486
 
                                 
See accompanying notes.
 
-5-

GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2005 and 2004
(Amounts in thousands)

 
   
June 30,
 
June 30,
 
   
2005
 
2004
 
   
(Unaudited)
 
           
Cash flows from operating activities
         
Net income
 
$
6,649
 
$
6,127
 
Adjustments to reconcile net income to net cash provided from operating activities
             
Provision for loan losses
   
2,682
   
2,685
 
Depreciation and amortization
   
1,763
   
1,499
 
Security amortization and accretion, net  
   
9
   
47
 
FHLB stock dividends
   
(128
)
 
(105
)
Net gain on sale of mortgage loans
   
(207
)
 
(243
)
Originations of mortgage loans held for sale
   
(16,755
)
 
(25,516
)
Proceeds from sales of mortgage loans
   
17,056
   
26,326
 
Increase in cash surrender value of life insurance
   
(289
)
 
(243
)
Net losses from sales of fixed assets
   
19
   
46
 
Net loss on OREO and repossessed assets
   
26
   
132
 
Deferred tax (benefit) expense
   
(797
)
 
1,788
 
Net changes:
             
Other assets
   
(1,076
)
 
366
 
Accrued interest payable and other liabilities
   
(5,327
)
 
743
 
Net cash provided from operating activities 
   
3,625
   
13,652
 
               
Cash flows from investing activities
             
Purchase of securities available for sale
   
(16,860
)
 
(4,000
)
Proceeds from maturities of securities held for sale
   
800
   
9,425
 
Proceeds from maturities of securities held to maturity
   
902
   
801
 
Purchase of life insurance
   
(1,450
)
 
--
 
Net change in loans
   
(115,364
)
 
(36,213
)
Proceeds from sale of other real estate
   
1,259
   
1,746
 
Proceeds from sale of fixed assets
   
8
   
20
 
Premises and equipment expenditures
   
(1,196
)
 
(2,255
)
Net cash used in investing activities
   
(131,901
)
 
(30,476
)
               
Cash flows from financing activities
             
Net change in deposits
   
150,413
   
(23,101
)
Net change in repurchase agreements
   
2,558
   
1,635
 
Proceeds from notes payable
   
161,255
   
62,950
 
Proceeds from subordinated debentures
   
3,093
   
--
 
Repayments of notes payable
   
(175,969
)
 
(29,318
)
Dividends paid
   
(1,837
)
 
(1,837
)
Proceeds from issuance of common stock
   
51
   
137
 
Repurchase of common stock
   
--
   
(538
)
Net cash provided from financing activities
   
139,564
   
9,928
 
               
Net change in cash and cash equivalents
   
11,288
   
(6,896
)
               
Cash and cash equivalents, beginning of year
   
70,648
   
41,341
 
               
Cash and cash equivalents, end of period
 
$
81,936
 
$
34,445
 
               
Supplemental disclosures - cash and noncash
             
Interest paid
 
$
11,842
 
$
7,715
 
Income taxes paid
   
3,275
   
2,570
 
Loans converted to other real estate
   
2,570
   
1,516
 
Unrealized (loss) gain on available for sale securities, net of tax
   
(95
)
 
(319
)
 
See accompanying notes.
 
-6-

GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
Unaudited
(Amounts in thousands, except share and per share data)
 
 
NOTE 1 - PRINCIPLES OF CONSOLIDATION
 
The accompanying unaudited condensed consolidated financial statements of Greene County Bancshares, Inc. (the “Company”) and its wholly owned subsidiary, Greene County Bank (the “Bank”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Certain amounts from prior period financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on net income or shareholders’ equity as previously reported.
 
NOTE 2 - STOCK COMPENSATION
 
Employee compensation expense under stock option plans is reported if options are granted below market price at grant date, whereas expense for options granted at market price are reported on a pro forma basis. Pro forma disclosures of net income and earnings per share are shown below using the fair value method of SFAS No. 123 to measure expense for options using the Black-Scholes option pricing model to estimate fair value.
 
The Company maintains a 2004 Long-Term Incentive Plan, pursuant to which 500,000 shares of common stock have been reserved for issuance to directors and employees of the Company and the Bank.  The plan provides for the issuance of awards in the form of stock options, stock appreciation rights, restricted shares, restricted share units, deferred share units and performance awards.  Stock options granted under the plan are typically granted at exercise prices equal to the fair market value of the Company's common stock on the date of grant and typically have terms of ten years and vest at an annual rate of 20%.
 
The following disclosures show the effect on income and earnings per share had the options’ fair value been recorded using an option pricing model.
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2005
 
2004
 
2005
 
2004
 
                   
Net income:
                 
As reported
 
$
3,714
 
$
3,275
 
$
6,649
 
$
6,127
 
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
   
4
   
10
   
7
   
19
 
Deduct: Total stock-based compensation expense determined under fair value-based method for all awards, net of tax
   
(40
)
 
(47
)
 
(130
)
 
(94
)
Pro forma
 
$
3,678
 
$
3,238
 
$
6,526
 
$
6,052
 
                           
Earnings per common share:
                         
As reported
 
$
0.49
 
$
0.43
 
$
0.87
 
$
0.80
 
Pro forma
 
$
0.48
 
$
0.42
 
$
0.85
 
$
0.78
 
                           
Diluted earnings per common share:
                         
As reported
 
$
0.48
 
$
0.42
 
$
0.86
 
$
0.79
 
Pro forma
 
$
0.47
 
$
0.42
 
$
0.84
 
$
0.78
 
                           
(Continued)
 


 
-7-

 
GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
Unaudited
(Amounts in thousands, except share and per share data)

 
NOTE 3 - LOANS (NET)
 
Loans at June 30, 2005 and December 31, 2004 were as follows:
 
   
June 30,
 
December 31,
 
   
2005
 
2004
 
           
Commercial
 
$
203,469
 
$
165,975
 
Commercial real estate
   
567,211
   
484,088
 
Residential real estate
   
312,462
   
319,713
 
Consumer
   
83,287
   
82,532
 
Other
   
2,895
   
4,989
 
     
1,169,324
   
1,057,297
 
               
Less: Unearned interest income
   
(10,680
)
 
(10,430
)
Allowance for loan losses
   
(16,880
)
 
(15,721
)
               
Net Loans
 
$
1,141,764
 
$
1,031,146
 
               
Transactions in the allowance for loan losses and certain information about nonaccrual loans and loans 90 days past due but still accruing interest for the six months ended June 30, 2005 and twelve months ended December 31, 2004 were as follows:
 
   
June 30,
2005
 
December 31,
2004
 
           
Balance at beginning of year
 
$
15,721
 
$
14,564
 
Add (deduct):
             
Reserve acquired in acquisition
   
-
   
363
 
Provision
   
2,682
   
5,836
 
Loans charged off
   
(2,481
)
 
(6,980
)
Recoveries of loans charged off
   
958
   
1,938
 
Ending balance
 
$
16,880
 
$
15,721
 
               
 
   
June 30,
2005
 
December 31,
2004
 
           
Loans past due 90 days still on accrual
 
$
384
 
$
664
 
Nonaccrual loans
   
6,770
   
6,242
 
Total
 
$
7,154
 
$
6,906
 
               
(Continued)


-8-

 
GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
Unaudited
(Amounts in thousands, except share and per share data)

 
NOTE 4 - EARNINGS PER SHARE OF COMMON STOCK

Basic earnings per share (EPS) of common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock is computed by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period. Stock options are regarded as potential common shares. Potential common shares are computed using the treasury stock method. For the three and six months ended June 30, 2005, 60,185 options are excluded from the effect of dilutive securities because they are anti-dilutive; 144,165 options are similarly excluded from the effect of dilutive securities for the three and six months ended June 30, 2004.
 
The following is a reconciliation of the numerators and denominators used in the basic and diluted earnings per share computations for the three and six months ended June 30, 2005 and 2004:
 
   
Three Months Ended June 30,
 
   
2005
 
2004
 
   
Income
 
Shares
 
Income
 
Shares
 
   
(Numerator)
 
(Denominator)
 
(Numerator)
 
(Denominator)
 
Basic EPS
                 
Income available to common shareholders
 
$
3,714
   
7,650,884
 
$
3,275
   
7,656,832
 
                           
Effect of dilutive securities
                         
Stock options outstanding
   
--
   
95,101
   
--
   
57,134
 
                           
Diluted EPS
                         
Income available to common shareholders plus assumed conversions
 
$
3,714
   
7,745,985
 
$
3,275
   
7,713,966
 
                           
  
   
Six Months Ended June 30,
 
   
2005
 
2004
 
   
Income
 
Shares
 
Income
 
Shares
 
   
(Numerator)
 
(Denominator)
 
(Numerator)
 
(Denominator)
 
                   
Basic EPS
                 
Income available to common shareholders
 
$
6,649
   
7,649,982
 
$
6,127
   
7,661,593
 
                           
Effect of dilutive securities
                         
Stock options outstanding
   
--
   
95,148
   
--
   
58,772
 
                           
Diluted EPS
                         
Income available to common shareholders plus assumed conversions
 
$
6,649
   
7,745,130
 
$
6,127
   
7,720,365
 
                           
(Continued)

 
-9-

GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
Unaudited
(Amounts in thousands, except share and per share data)

 
NOTE 5 - SEGMENT INFORMATION

The Company’s operating segments include banking, mortgage banking, consumer finance, subprime automobile lending and title insurance. The reportable segments are determined by the products and services offered, and internal reporting. Loans, investments, and deposits provide the revenues in the banking operation; loans and fees provide the revenues in consumer finance, mortgage banking, and subprime lending; and insurance commissions provide revenues for the title insurance company. Consumer finance, subprime automobile lending and title insurance do not meet the quantitative threshold on an individual basis, and are therefore shown below in “Other Segments”. Mortgage banking operations are included in “Bank”. All operations are domestic.
 
Segment performance is evaluated using net interest income and noninterest income. Income taxes are allocated based on income before income taxes, and indirect expenses (includes management fees) are allocated based on time spent for each segment. Transactions among segments are made at fair value. Information reported internally for performance assessment follows.

Three months ended June 30, 2005
 
Bank
 
Other Segments
 
Holding Company
 
Eliminations
 
Totals
 
                       
Net interest income (expense)
 
$
12,698
 
$
1,547
 
$
(173
)
$
--
 
$
14,072
 
Provision for loan losses
   
738
   
322
   
--
   
--
   
1,060
 
Noninterest income
   
3,163
   
516
   
6
   
(222
)
 
3,463
 
Noninterest expense
   
9,389
   
1,086
   
169
   
(222
)
 
10,422
 
Income tax expense (benefit)
   
2,212
   
257
   
(130
)
 
--
   
2,339
 
 Segment profit
 
$
3,522
 
$
398
 
$
(206
)
$
--
 
$
3,714
 
Segment assets at June 30, 2005
 
$
1,340,531
 
$
31,272
 
$
2,391
 
$
--
 
$
1,374,194
 
                                 
 
Three months ended June 30, 2004
 
Bank
 
Other Segments
 
Holding Company
 
Eliminations
 
Totals
 
                       
Net interest income (expense)
 
$
10,504
 
$
1,600
 
$
(121
)
$
--
 
$
11,983
 
Provision for loan losses
   
783
   
379
   
--
   
--
   
1,162
 
Noninterest income
   
2,867
   
391
   
7
   
(195
)
 
3,070
 
Noninterest expense
   
7,431
   
1,140
   
198
   
(195
)
 
8,574
 
Income tax expense (benefit)
   
1,974
   
185
   
(117
)
 
--
   
2,042
 
 Segment profit
 
$
3,183
 
$
287
 
$
(195
)
$
--
 
$
3,275
 
Segment assets at June 30, 2004
 
$
1,091,319
 
$
31,803
 
$
1,880
 
$
--
 
$
1,125,002
 
                                 
 
Six months ended June 30, 2005
 
Bank
 
Other Segments
 
Holding Company
 
Eliminations
 
Totals
 
                       
Net interest income (expense)
 
$
24,687
 
$
3,024
 
$
(312
)
$
--
 
$
27,399
 
Provision for loan losses
   
2,027
   
655
   
--
   
--
   
2,682
 
Noninterest income
   
5,943
   
918
   
189
   
(411
)
 
6,639
 
Noninterest expense
   
18,627
   
2,184
   
297
   
(411
)
 
20,697
 
Income tax expense (benefit)
   
3,789
   
433
   
(212
)
 
--
   
4,010
 
 Segment profit
 
$
6,187
 
$
670
 
$
(208
)
$
--
 
$
6,649
 
                                 
 
Six months ended June 30, 2004
 
Bank
 
Other Segments
 
Holding Company
 
Eliminations
 
Totals
 
                       
Net interest income (expense)
 
$
20,898
 
$
3,191
 
$
(226
)
$
--
 
$
23,863
 
Provision for loan losses
   
1,836
   
849
   
--
   
--
   
2,685
 
Noninterest income
   
5,579
   
791
   
174
   
(380
)
 
6,164
 
Noninterest expense
   
15,207
   
2,280
   
418
   
(380
)
 
17,525
 
Income tax expense (benefit)
   
3,577
   
333
   
(220
)
 
--
   
3,690
 
 Segment profit
 
$
5,857
 
$
520
 
$
(250
)
$
--
 
$
6,127
 
                                 
(Continued)
 
-10-

GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
Unaudited
(Amounts in thousands, except share and per share data)

 
NOTE 5 - SEGMENT INFORMATION (Continued)

Asset Quality Ratios
 
As of and for the period ended June 30, 2005
 
Bank
 
Other
 
Total
 
               
Nonperforming loans as a percentage of total loans net of unearned income
   
0.59
%
 
1.29
%
 
0.62
%
Nonperforming assets as a percentage of total assets
   
0.64
%
 
1.97
%
 
0.69
%
Allowance for loan losses as a percentage of total loans net of unearned income
   
1.25
%
 
7.71
%
 
1.46
%
Allowance for loan losses as a percentage of nonperforming assets
   
163.27
%
 
369.92
%
 
177.74
%
Annualized net charge-offs to average total loans, net of unearned income
   
0.16
%
 
4.19
%
 
0.27
%
                     
 
As of and for the period ended June 30, 2004
 
Bank
 
Other
 
Total
 
               
Nonperforming loans as a percentage of total loans net of unearned income
   
0.52
%
 
2.23
%
 
0.59
%
Nonperforming assets as a percentage of total assets
   
0.74
%
 
3.24
%
 
0.84
%
Allowance for loan losses as a percentage of total loans net unearned income
   
1.24
%
 
8.55
%
 
1.51
%
Allowance for loan losses as a percentage of nonperforming assets
   
145.67
%
 
254.22
%
 
158.23
%
Annualized net charge-offs to average total loans, net of unearned income
   
0.29
%
 
5.62
%
 
0.48
%
                     
 
As of and for the year ended December 31, 2004
 
Bank
 
Other
 
Total
 
               
Nonperforming loans as a percentage of total loans net of unearned income
   
0.60
%
 
2.22
%
 
0.66
%
Nonperforming assets as a percentage of total assets
   
0.61
%
 
2.90
%
 
0.69
%
Allowance for loan losses as a percentage of total loans net unearned income
   
1.27
%
 
7.77
%
 
1.50
%
Allowance for loan losses as a percentage of nonperforming assets
   
176.54
%
 
255.69
%
 
185.56
%
Net charge-offs to average total loans, net of unearned income
   
0.35
%
 
5.04
%
 
0.51
%
                     
(Continued)


-11-

GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
Unaudited
(Amounts in thousands, except share and per share data)


NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill
 
Goodwill was no longer amortized starting in 2002; however, it is periodically evaluated for impairment and no impairment was recognized during the second quarter of 2005. Goodwill had a carrying amount of $18,282 at June 30, 2005 and December 31, 2004.
 
Core deposit and other intangibles
 
Other intangible assets consist of core deposit intangibles arising from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on a straight-line method over their estimated useful lives, which is 10 years.
 
Core deposit intangibles had a gross carrying amount of $7,320 for the period ended June 30, 2005 and the year ended December 31, 2004 and accumulated amortization of $2,283 and $1,907 for the same periods, respectively. Aggregate amortization expense for the three and six months ended June 30, 2005 was $188 and $376, respectively, as compared to $154 and $308, respectively, for the same periods in 2004. Annual estimated amortization expense for the next five years is:
 
2005
 
$
752
 
2006
   
642
 
2007
   
642
 
2008
   
642
 
2009
   
642
 
Total
 
$
3,320
 

NOTE 7 - SUBORDINATED DEBENTURES

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

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

NOTE 8 - PENDING ACQUISITION

Following the end of the quarter ended June 30, 2005, the Bank agreed to purchase five bank branches in Clarksville, Tennessee from Old National Bank, Evansville, Indiana. These branches had approximately $172,000 in deposits and approximately $120,000 in loans at June 30, 2005. The consummation of this transaction is subject to the satisfaction of various customary closing conditions, including the receipt of required regulatory approvals, and is expected to occur in the fourth quarter of 2005.

 
-12-

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, which are based on assumptions and estimates and describe our future plans, strategies and expectations, are generally identifiable by the use of the words “anticipate,”“will,”“believe,”“may,”“could,”“would,”“should,”“estimate,”“expect,”“intend,”“seek,” or similar expressions. These forward-looking statements may address, among other things, the Company's business plans, objectives or goal for future operations or expansion, the Company's forecasted revenues, earnings, assets or other measures of performance, or estimates of risks and future costs and benefits. Although these statements reflect the Company's good faith belief based on current expectations, estimates and projections, they are subject to risks, uncertainties and assumptions and are not guarantees of future performance. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include, but are not limited to, the following:
 
 
the Company's potential growth, including its entrance or expansion into new markets, and the need for sufficient capital to support that growth;
 
 
changes in the quality or composition of the Company's loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers or issuers;
 
 
an insufficient allowance for loan losses as a result of inaccurate assumptions;
 
 
changes in interest rates, yield curves and interest rate spread relationships;
 
 
the strength of the economies in the Company's target market areas, as well as general economic, market or business conditions;
     
  changes in demand for loan products and financial services;
     
  increased competition or market concentration;
     
  concentration of credit exposure;
     
  new state or federal legislation, regulations, or the initiation or outcome of litigation; and
     
  other circumstances, many of which may be beyond the Company's control.
     
If one or more of these risks or uncertainties materialize, or if any of the Company's underlying assumptions prove incorrect, the Company's actual results, performance or achievements may vary materially from future results, performance or achievements expressed or implied by these forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by the cautionary statements in this section. The Company does not intend to and assumes no responsibility for updating or revising any forward-looking statements contained 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-

Presentation of Amounts

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

General

Greene County Bancshares, Inc. (the “Company”) is the bank holding company for Greene County Bank (the “Bank”), a Tennessee-chartered commercial bank that conducts the principal business of the Company. The Company is the second largest bank holding company headquartered in Tennessee. The Bank currently maintains a main office in Greeneville, Tennessee and 42 full-service bank branches primarily in East and Middle Tennessee. In addition to its commercial banking operations, the Bank conducts separate businesses through its three wholly-owned subsidiaries: Superior Financial Services, Inc. (“Superior Financial”), a consumer finance company; GCB Acceptance Corporation (“GCB Acceptance”), a subprime automobile lending company; and Fairway Title Co., a title company formed in 1998. The Bank also operates a mortgage banking operation which has its main office in Knox County, Tennessee, and a trust and money management function doing business as Presidents Trust from an office in Wilson County, Tennessee.

Growth Strategy

The Company expects that, over the intermediate term, its growth from mergers and acquisitions, including acquisitions of both entire financial institutions and selected branches of financial institutions, will continue. De novo branching is also expected to be a method of growth, particularly in high-growth and other demographically desirable markets. Since 2003, the Company has focused on bringing its community-focused style of banking to Middle Tennessee, including the Nashville metropolitan statistical area, and on continuing its growth in the Knoxville metropolitan statistical area.
 
On November 21, 2003, the Company entered the Middle Tennessee market by completing its acquisition of Gallatin, Tennessee-based Independent Bankshares Corporation ("IBC"). IBC was the bank holding company for First Independent Bank, which had four offices in Gallatin and Hendersonville, Tennessee, and Rutherford Bank and Trust, with three offices in Murfreesboro and Smyrna, Tennessee. First Independent Bank and Rutherford Bank and Trust were subsequently merged with the Bank, with the Bank as the surviving entity.
 
On November 15, 2004 the Company established banking operations in Nashville, Tennessee, in Davidson County, with the opening of a full-service branch operating under the name of Middle Tennessee Bank & Trust. This new branch, like all of the Bank’s bank brands, operates within the Bank’s structure. This new branch expanded the Company’s presence in the Middle Tennessee market and helped fill in the market between Sumner and Rutherford Counties. In 2005, Middle Tennessee Bank & Trust has opened a new branch in Williamson County, Tennessee and expects to open another new branch in Davidson County, Tennessee by the end of 2005.

 
The Company opened a new branch in Knoxville, Tennessee in late 2003 and expects that it will open its second branch in that city during the first-half of 2006.
 
On December 10, 2004 the Company purchased three full-service branches from National Bank of Commerce located in Lawrence County Tennessee. This purchase (“NBC transaction”) adds to the Bank’s presence in Middle Tennessee.

Following the end of the quarter ended June 30, 2005, the Bank agreed to purchase five bank branches in Clarksville, Tennessee from Old National Bank, Evansville, Indiana. These branches had approximately $172,000 in deposits and approximately $120,000 in loans at June 30, 2005. The consummation of this transaction is subject to the satisfaction of various customary closing conditions, including the receipt of required regulatory approvals, and is expected to occur in the fourth quarter of 2005.

Overview

The Company's results of operations for the second quarter and the six-month period ended June 30, 2005, compared to the same periods in 2004, reflected an increase in interest income due primarily to loan growth as a result of the Company’s expansion initiatives, offset, in part, by an increase in interest expense as a result of increased deposit levels resulting from its expansion efforts and competitive deposit pricing pressures.

-14-

The increase in net interest income was also offset, in part, by an increase in noninterest expense which was reflective of the Company’s expansion efforts into Middle Tennessee and the Company's branch expansion in its Knoxville, Tennessee market as well as expenses associated with the establishment of the Company's High Performance Checking Program. Noninterest income also increased for both the three and six months ended June 30, 2005 as compared to the comparable periods in 2004 as a result of increased deposit service charges and Non-Sufficient Funds (“NSF”) fees resulting from the Company's expansion efforts and recently introduced High Performance Checking Program.

The Company's net interest margin for the quarter and six months ended June 30, 2005 continued to experience compression as a result of deposit pricing pressures that the Company continued to experience as it aggressively attempted to generate deposits to support its loan growth and as deposit growth outpaced loan growth for the six months ended June 30, 2005 following the implementation of the Company's High Performance Checking Program. The Company's net interest margin also experienced compression as a result of the Company's competitive pricing of its loans particularly in its Middle Tennessee market and its emphasis on originating more traditional loans while controlling the growth of its higher-yielding subprime loans at its non-bank subsidiaries. The Company believes that if interest rates remain stable it will continue to experience compression in its net interest margin for the remainder of 2005 as a result of loan and deposit pricing pressures but that if interest rates continue to rise, based on the Company's current mix of interest-earning assets and interest-bearing liabilities, the Company believes its net interest margin will begin to increase.

At June 30, 2005, the Company had total consolidated assets of approximately $1,374,000, total consolidated deposits of approximately $1,148,000, total consolidated net loans, net of unearned income and allowance for loan losses, of approximately $1,142,000, and total consolidated shareholders' equity of approximately $113,500. The Company's annualized return on average shareholders' equity for the three and six months ended June 30, 2005, was 13.11% and 11.86%, respectively and its return on average total assets for the same periods was 1.11% and 1.02%, respectively. The Company expects that its total assets, total consolidated deposits, total consolidated net loans and total shareholders' equity will continue to increase over the remainder of 2005 as a result of its expansion efforts, including its branch expansion in Middle Tennessee and its anticipated acquisition of the five bank branches in Clarksville, Tennessee from Old National Bank, which is expected to close in the fourth quarter of 2005.

Critical Accounting Policies and Estimates
 
The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.

Management continually evaluates the Company’s accounting policies and estimates it uses to prepare the consolidated financial statements. In general, management’s estimates are based on historical experience, information from regulators and third party professionals and various assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ significantly from those estimates made by management.

The Company believes its critical accounting policies and estimates include the valuation of the allowance for loan losses and the fair value of financial instruments and other accounts. Based on management’s calculation, an allowance of $16,880, or 1.46%, of total loans, net of unearned interest, was an adequate estimate of losses within the loan portfolio as of June 30, 2005. This estimate resulted in a provision for loan losses on the income statement of $1,060 and $2,682, respectively, for the three and six months ended June 30, 2005. If the mix and amount of future charge-off percentages differ significantly from those assumptions used by management in making its determination, the allowance for loan losses and provision for loan losses on the income statement could be materially affected.
 
The consolidated financial statements include certain accounting and disclosures that require management to make estimates about fair values. Estimates of fair value are used in the accounting for securities available for sale, loans held for sale, goodwill, other intangible assets, and acquisition purchase accounting adjustments. Estimates of 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, prepayments and other factors. The fair values of financial instruments are subject to change as influenced by market conditions.

-15-

Changes in Results of Operations

Net income. Net income for the three months ended June 30, 2005 was $3,714 as compared to $3,275 for the same period in 2004. This increase of $439, or 13.40%, resulted primarily from a $2,089, or 17.43%, increase in net interest income reflecting principally increased volume of interest-earning assets arising primarily from the Company’s expansion initiatives and related growth in the loan portfolio. Offsetting this increase was a $1,848, or 21.55%, increase in total noninterest expense from $8,574 for the three months ended June 30, 2004 to $10,422 for the same period of 2005. This increase is also primarily attributable to the Company’s expansion initiatives, as discussed above.

Net income for the six months ended June 30, 2005 was $6,649 as compared to $6,127 for the same period in 2004. The increase of $522, or 8.52%, reflects substantially the same trends that existed during the quarter ended June 30, 2005.
 
Net Interest Income. The largest source of earnings for the Company is net interest income, which is the difference between interest income on interest-earning assets and interest paid on deposits and other interest-bearing liabilities. The primary factors which affect net interest income are changes in volume and yields of interest-earning assets and interest-bearing liabilities, which are affected in part by management’s responses to changes in interest rates through asset/liability management. During the three months ended June 30, 2005, net interest income was $14,072 as compared to $11,983 for the same period in 2004, representing an increase of 17.43%. While the Company’s average balances of interest-earning assets increased more than the average balances of interest-bearing liabilities in the three months ended June 30, 2005, as compared to the same quarter in 2004, thus enhancing net interest income, such increase was offset, in part, by the smaller increase in yield on these interest-earning assets as compared to the cost of interest-bearing liabilities. Nevertheless, the Company experienced a substantial increase in net interest income, as noted above, in the three months ended June 30, 2005 as compared to the same quarter in 2004. The Company’s net interest margin decreased to 4.57% for the three months ended June 30, 2005 as compared to 4.69% for the same period in 2004, and declined 24 basis points from the 4.81% net interest margin for the three months ended December 31, 2004. The Company’s net interest margin also declined for the six months ended June 30, 2005, falling to 4.61% when compared to 4.69% for the same period in 2004. In order to fund its strong loan growth, the Company has pursued aggressive deposit rates throughout all its markets, resulting in margin compression that is not expected to abate in the near term despite the Company’s asset-sensitive interest rate risk position. In addition, management has been controlling the growth of higher-yielding subprime loans in the Bank’s subsidiaries and focusing on increasing the balances of its traditional commercial, commercial real estate and residential real estate loans, thus reducing the percentage of subprime loans in the Company’s portfolio. This trend in the loan mix also constrains the increases in loan yields during a rising interest rate environment notwithstanding the Company’s asset-sensitive balance sheet. Nevertheless, if interest rates continue to increase, based on the Company’s current mix of interest-earning assets and interest-bearing liabilities, the Company believes its net interest margin will begin to increase over the course of the remainder of 2005. Further, in view of the Company’s asset-sensitive position, management anticipates declines in net interest margin if product mixes remain relatively unchanged and interest rates reverse their upward trend and begin to decline. In addition, even if interest rates remain stable, the Company’s net interest margin could decline due to competitive pressures related to both loan and deposit pricing. 

For the six months ended June 30, 2005, net interest income increased by $3,536, or 14.82%, to $27,399 from $23,863 for the same period in 2004, and the same trends outlined above with respect to the three months ended June 30, 2005 were observed.

-16-

The following tables set forth certain information relating to the Company’s consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. These yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented.
 
   
Three Months Ended
 
   
June 30,
 
   
2005
 
2004
 
   
Average
 
 
 
Average
 
Average
 
 
 
Average
 
   
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
Interest-earning assets:
                         
Loans
 
$
1,140,537
 
$
19,851
   
6.98
%
$
984,417
 
$
15,522
   
6.34
%
Investment securities
   
60,691
   
592
   
3.91
%
 
39,203
   
339
   
3.48
%
Other short-term investments
   
33,265
   
260
   
3.13
%
 
3,560
   
8
   
0.90
%
Total interest-earning assets
   
1,234,493
 
$
20,703
   
6.73
%
 
1,027,180
 
$
15,869
   
6.21
%
Noninterest earning assets
   
104,107
               
96,182
             
Total assets
 
$
1,338,600
             
$
1,123,362
             
                                       
Interest-bearing liabilities:
                                     
Deposits:
                                     
Now accounts, money market and savings
 
$
401,441
 
$
1,161
   
1.16
%
$
345,250
 
$
403
   
0.47
%
Time Deposits
   
598,470
   
4,340
   
2.91
%
 
465,914
   
2,603
   
2.25
%
Total interest-bearing deposits
  $
999,911
 
$ 
5,501
   
2.21
%
$ 
811,164
 
$ 
3,006
   
1.49
%
Securities sold under repurchase agreements and short-term borrowings
   
15,014
   
95
   
2.54
%
 
16,026
   
34
   
0.85
%
Notes payable
   
81,000
   
1,035
   
5.13
%
 
72,621
   
846
   
4.69
%
Total interest-bearing liabilities
 
$ 
1,095,925
 
$
6,631
   
2.43
%
$ 
899,811
 
$
3,886
   
1.74
%
Noninterest bearing liabilities:
                                     
Demand deposits
   
116,436
               
104,966
             
Other liabilities
   
12,942
               
12,819
             
Total noninterest bearing liabilities
 
 
129,378
               
117,785
             
Total liabilities
   
1,225,303
               
1,017,596
             
Shareholders’ equity
   
113,297
               
105,766
             
Total liabilities and shareholders’ equity
 
$
1,338,600
             
$
1,123,362
             
                                       
Net interest income
       
$
14,072
             
$
11,983
       
                                       
Interest rate spread
               
4.30
%
             
4.48
%
                                       
Net yield on interest-earning assets
               
4.57
%
             
4.69
%


-17-

 
   
Six Months Ended
 
   
June 30,
 
   
2005
 
2004
 
   
Average
 
 
 
Average
 
Average
 
 
 
Average
 
   
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
Interest-earning assets:
                         
Loans
 
$
1,110,231
 
$
37,930
   
6.89
%
$
976,613
 
$
31,047
   
6.39
%
Investment securities
   
55,874
   
1,065
   
3.84
%
 
41,145
   
725
   
3.54
%
Other short-term investments
   
33,694
   
443
   
2.65
%
 
5,830
   
27
   
0.93
%
Total interest-earning assets
   
1,199,799
 
$
39,438
   
6.63
%
 
1,023,588
 
$
31,799
   
6.25
%
Noninterest earning assets
   
103,339
               
99,989
             
Total assets
 
$
1,303,138
             
$
1,123,577
             
                                       
Interest-bearing liabilities:
                                     
Deposits:
                                     
Now accounts, money market and savings
 
$
395,246
 
$
2,027
   
1.03
%
$
340,165
 
$
805
   
0.48
%
Time Deposits
   
561,428
   
7,736
   
2.78
%
 
474,379
   
5,387
   
2.28
%
Total interest-bearing deposits
 
$ 
956,674
 
$ 
9,763
   
2.06
%
$
814,544
  $
6,192
   
1.53
%
Securities sold under repurchase agreement and short-term borrowings
   
16,712
   
184
   
2.22
%
 
16,826
   
67
   
0.80
%
Notes payable
   
86,740
   
2,092
   
4.86
%
 
71,852
   
1,677
   
4.69
%
Total interest-bearing liabilities
 
$ 
1,060,126
 
$
12,039
   
2.29
%
$ 
903,222
 
$
7,936
   
1.77
%
Noninterest bearing liabilities:
                                     
Demand deposits
   
116,644
               
102,755
             
Other liabilities
   
14,235
               
12,794
             
Total noninterest bearing liabilities
   
130,879
               
115,549
             
Total liabilities
   
1,191,005
               
1,018,771
             
Shareholders’ equity
   
112,133
               
104,806
             
Total liabilities and shareholders’ equity
 
$
1,303,138
             
$
1,123,577
             
                                       
Net interest income
       
$
27,399
             
$
23,863
       
                                       
Interest rate spread
               
4.34
%
             
4.48
%
                                       
Net yield on interest-earning assets
               
4.61
%
             
4.69
%


-18-

Provision for Loan Losses. During the three and six months ended June 30, 2005, loan charge-offs were $1,281 and $2,481, respectively, and recoveries of charged-off loans were $537 and $958, respectively. The Company’s provision for loan losses decreased by $102, or 8.78%, and $3, or 0.11%, to $1,060 and $2,682 for the three and six months ended June 30, 2005, respectively, as compared to $1,162 and $2,685 for the same periods in 2004. The Company’s allowance for loan losses increased by $1,159 to $16,880 at June 30, 2005 from $15,721 at December 31, 2004, with the ratio of the allowance for loan losses to total loans, net of unearned income, declining to 1.46% at June 30, 2005 from 1.50% and 1.51% at December 31, 2004 and June 30, 2004, respectively. As of June 30, 2005, indicators of credit quality, as discussed below, are mixed compared to December 31, 2004 but generally improved compared to June 30, 2004. Management continually evaluates the Company’s credit policies and procedures for effective risks and controls management.  The Company’s trend in asset quality improvement is attributable to improved underwriting policies and management controls.  Management believes the Company’s asset quality indicators are sustainable within the current economic environment. The ratio of allowance for loan losses to nonperforming assets was 177.74%, 185.56% and 158.23% at June 30, 2005, December 31, 2004 and June 30, 2004, respectively, and the ratio of nonperforming assets to total assets was 0.69%, 0.69% and 0.84% at June 30, 2005, December 31, 2004 and June 30, 2004, respectively. The ratio of nonperforming loans to total loans, excluding loans held for sale, was 0.62%, 0.66% and 0.59% at June 30, 2005, December 31, 2004 and June 30, 2004, respectively. Within the Bank, the Company’s largest subsidiary, the ratio of nonperforming assets to total assets was 0.64%, 0.61% and 0.74% at June 30, 2005, December 31, 2004 and June 30, 2004, respectively.

The Company’s annualized net charge-offs for the six months ended June 30, 2005 were $3,046 compared to actual net charge-offs of $5,042 for the year ended December 31, 2004. Annualized net charge-offs as a percentage of average loans improved from 0.48% for the six months ended June 30, 2004 to 0.27% for the six months ended June 30, 2005. Net charge-offs as a percentage of average loans were 0.51% for the year ended December 31, 2004. Within the Bank, annualized net charge-offs as a percentage of average loans fell from 0.29% for the six months ended June 30, 2004 to 0.16% for the same period in 2005. Net charge-offs within the Bank as a percentage of average loans were 0.35% for the year ended December 31, 2004. Annualized net charge-offs in the Bank for the six months ended June 30, 2005 were $1,716 compared to actual net charge-offs of $3,418 for the year ended December 31, 2004. Annualized net charge-offs in Superior Financial for the six months ended June 30, 2005 were $497 compared to actual net charge-offs of $525 for the year ended December 31, 2004. Annualized net charge-offs in GCB Acceptance for the six months ended June 30, 2005 were $833 compared to actual net charge-offs of $1,099 for the year ended December 31, 2004. At this point, management believes that total charge-offs for 2005 in Superior Financial and GBC Acceptance will slightly improve compared to 2004 charge-offs based on asset quality trends.

Based on the Company's allowance for loan loss calculation and review of the loan portfolio, management believes the allowance for loan losses is adequate at June 30, 2005. Management anticipates that the provision for loan losses during the third quarter of 2005 will be consistent with the second quarter of 2005 and also anticipates that the provision for loan losses for the entire year of 2005 may be less than the provision for 2004 if indicators of credit quality remain stabilized. However, the provision for loan losses could increase for the entire year of 2005, as compared to 2004, if the Company’s loan growth continues at the rate experienced through the six months ended June 30, 2005.
 
Noninterest Income. Income that is not related to interest-earning assets, consisting primarily of service charges, commissions and fees, has become an important supplement to the Company’s traditional method of earning income through interest rate spreads.
 
Total noninterest income for the three and six months ended June 30, 2005 was $3,463 and $6,639 as compared to $3,070 and $6,164, respectively, for the same periods in 2004. Service charges, commissions and fees remain the largest component of total noninterest income and increased from $2,518 and $4,913 for the three and six months, respectively, ended June 30, 2004 to $2,836 and $4,978, respectively, for the same periods in 2005. This increase primarily reflects additional service charges and NSF fees from deposit-related products stemming primarily from increased volume as a result of the Bank’s High Performance Checking Program introduced in the first quarter of 2005 and also its expansion efforts. The Company believes that noninterest income will continue to improve over the second half of 2005 when compared to prior comparable periods as a result of the increased volume in deposits resulting from the Bank’s expansion efforts and its new High Performance Checking Program. In addition, other noninterest income increased by $75 and $410 to $627 and $1,661 for the three and six months ended June 30, 2005, respectively, from $552 and $1,251 for the same periods in 2004. This increase for the six months ended June 30, 2005 is primarily attributable to increased fees of $195 from the sale of mutual funds and annuities and $99 from the sale of the Company’s interest in an ATM network vendor.

-19-

Noninterest Expense. Control of noninterest expense also is an important aspect in enhancing income. Noninterest expense includes personnel, occupancy, and other expenses such as data processing, printing and supplies, legal and professional fees, postage, FDIC assessment, etc. Total noninterest expense was $10,422 and $20,697 for the three and six months ended June 30, 2005 compared to $8,574 and $17,525 for the same periods in 2004. The $1,848, or 21.55%, increase in total noninterest expense for the three months ended June 30, 2005 compared to the same period of 2004 principally reflects increases in all expense categories primarily as a result of the Company’s expansion program as well as costs of $384 associated with the Bank’s High Performance Checking Program, which the Company expects will continue for the remainder of 2005. This program is designed to generate significant numbers and balances of core transaction accounts.

Similarly, the $3,172 or 18.10%, increase in total noninterest expense for the six months ended June 30, 2005 compared to the same period in 2004 reflects substantially the same trends that existed during the quarter ended June 30, 2005.

Personnel costs are the primary element of the Company's noninterest expenses. For the three and six months ended June 30, 2005, salaries and benefits represented $5,099, or 48.93%, and $10,344, or 49.98%, respectively, of total noninterest expense. This was an increase of $635, or 14.22%, and $1,173, or 12.79%, respectively, from the $4,464 and $9,171 for the three and six months ended June 30, 2004. Including Bank branches and non-bank office locations, the Company had 53 locations at June 30, 2005 and at December 31, 2004, as compared to 49 at June 30, 2004, and the number of full-time equivalent employees increased 6.33% from 458 at June 30, 2004 to 487 at June 30, 2005. These increases in personnel costs, number of branches and employees are primarily the result of the Company’s expansion initiative and are expected to increase for the remainder of 2005 with the Company’s continued expansion efforts in Middle Tennessee and Knoxville and as a result of the Bank’s proposed acquisition of five Clarksville, Tennessee branches from Old National Bank.
 
Primarily as a result of this overall increase in noninterest expense, the Company’s efficiency ratio was negatively affected, as the ratio increased from 58.36% at June 30, 2004 to 60.81% at June 30, 2005. The efficiency ratio illustrates how much it cost the Company to generate revenue. For example, it cost the Company 60.81 cents to generate one dollar of revenue for the six months ended June 30, 2005 as compared to 58.36 cents for the six months ended June 30, 2004. The Company believes that its efficiency ratio will continue to be negatively impacted for the remainder of 2005 as a result of its continued expansion efforts.

Income Taxes. The effective income tax rate for the three and six months ended June 30, 2005 was 38.64% and 37.63%, respectively, compared to 38.41% and 37.59% for the same periods in 2004.
 
Changes in Financial Condition
 
Total assets at June 30, 2005 were $1,374,194, an increase of $140,791, or 11.41%, from total assets of $1,233,403 at December 31, 2004. The increase in assets was primarily reflective of the $110,618, or 10.73%, increase, as reflected on the Condensed Consolidated Balance Sheets, in net loans, excluding loans held for sale, and was funded by the $150,412, or 15.07%, increase in deposits resulting from the Company’s expansion efforts and its High Performance Checking Program.
 
At June 30, 2005, loans, net of unearned income and allowance for loan losses, were $1,141,764 compared to $1,031,146 at December 31, 2004, an increase of $110,618, or 10.73%, from December 31, 2004. The increase in loans during the first six months of 2005 primarily reflects an increase in commercial real estate loans and commercial loans and the growth in the loan portfolio of Middle Tennessee Bank & Trust.
 
Non-performing loans include non-accrual loans and loans 90 or more days past due. All loans that are 90 days past due are considered non-accrual unless they are adequately secured and there is reasonable assurance of full collection of principal and interest. Non-accrual loans that are 120 days past due without assurance of repayment are charged off against the allowance for loan losses. Nonaccrual loans and loans past due 90 days and still accruing increased slightly by $248, or 3.59%, during the six months ended June 30, 2005 to $7,154 from $6,906 at December 31, 2004. At June 30, 2005, the ratio of the Company’s allowance for loan losses to non-performing assets (which include non-accrual loans) was 177.74% compared to 185.56% at December 31, 2004.
 
-20-

The Company maintains an investment portfolio to provide liquidity and earnings. Investments at June 30, 2005 with an amortized cost of $54,892 had a market value of $54,719. At December 31, 2004, investments with an amortized cost of $39,742 had a market value of $39,824. The increase in investments from December 31, 2004 to June 30, 2005 results from the purchase of short-term federal agency securities as well as mortgage-backed securities reflecting management’s decision to channel more of the Company’s liquid assets into more favorable positions on the yield curve.
 
Liquidity and Capital Resources

Liquidity. Liquidity refers to the ability or the financial flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for reserve requirements, customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company's liquid assets include cash and due from banks, federal funds sold, investment securities and loans held for sale. Including securities pledged to collateralize municipal deposits, these assets represented 11.53% of the total liquidity base at June 30, 2005, as compared to 10.63% at December 31, 2004. The liquidity base is generally defined to include deposits, repurchase agreements, notes payable and subordinated debentures. In addition, the Company maintains borrowing availability with the Federal Home Loan Bank of Cincinnati (“FHLB”) approximating $29,283 at June 30, 2005. The Company also maintains federal funds lines of credit totaling $111,000 at nine correspondent banks, of which $111,000 was available at June 30, 2005. The Company believes it has sufficient liquidity to satisfy its current operating needs.

For the six months ended June 30, 2005, operating activities of the Company provided $3,625 of cash flows. Net income of $6,649 comprised a substantial portion of the cash generated from operations. Cash flows from operating activities were also positively affected by various non-cash items, including (i) $2,682 in provision for loan losses, and (ii) $1,763 of depreciation and amortization. These increases in cash flows were offset by (i) $5,327 decrease in accrued interest payable and other liabilities, (ii) $1,076 increase in other assets, and (iii) deferred tax benefit of $797. In addition, the cash flows provided by the proceeds from sales of mortgage loans exceeded the cash flows used by the originations of mortgage loans held for sale by $301.

The Company’s net increase in loans used $115,364 in cash flows and was the primary component of the $131,901 in net cash used in investing activities for the six months ended June 30, 2005. In addition, the Company purchased $16,860 in investment securities available for sale. Purchases of additional insurance related to certain benefit plans used $1,450 in cash flows, and fixed asset additions, net of proceeds from sale of fixed assets, used $1,188 in cash flows.

The net increase in deposits of $150,413 was the primary source of cash flows from financing activities. These cash flows were offset, in part, by the excess of repayments of notes payable over proceeds from notes payable in the amount of $14,713. In addition, dividends paid in the amount of $1,837 further reduced the total net cash provided from financing activities.
 
Capital Resources. The Company’s capital position is reflected in its shareholders’ 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 capital position while consistently paying dividends to its shareholders. Further, the capital base of the Company allows it to take advantage of business opportunities while maintaining the level of resources deemed appropriate by management of the Company to address business risks inherent in the Company’s daily operations.

On September 25, 2003, the Company issued $10,310 of subordinated debentures, as part of a privately placed pool of trust preferred securities. The securities, due in 2033, bear interest at a floating rate of 2.85% above the three-month LIBOR rate, reset quarterly, and are callable in five years from the date of issuance without penalty. The Company used the proceeds of the offering to support its acquisition of IBC, and the capital raised from the offering qualifies as Tier 1 capital for regulatory purposes.
 
On June 28, 2005, the Company issued an additional $3,093 of subordinated debentures, as part 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-month LIBOR rate, reset quarterly, and are callable in five years from the date of issuance without penalty. The Company used the proceeds to augment its capital position in connection with its significant asset growth, and the capital raised from the offering qualifies as Tier 1 capital for regulatory purposes.

-21-

Shareholders’ equity on June 30, 2005 was $113,486, an increase of $4,768, or 4.39%, from $108,718 on December 31, 2004. The increase in shareholders’ equity primarily reflected net income for the six months ended June 30, 2005 of $6,649 ($0.86 per share, assuming dilution). This increase was offset by quarterly dividend payments during the six months ended June 30, 2005 totaling $1,837 ($0.24 per share).

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

The Company’s primary source of liquidity is dividends paid by the Bank. Applicable Tennessee statutes and regulations impose restrictions on the amount of dividends that may be declared by the Bank. Further, any dividend payments are subject to the continuing ability of the Bank to maintain its compliance with minimum federal regulatory capital requirements and to retain its characterization under federal regulations as a “well-capitalized” institution.
 
Risk-based capital regulations adopted by the Board of Governors of the Federal Reserve Board (“FRB”) and the Federal Deposit Insurance Corporation (the “FDIC”) require bank holding companies and banks, respectively, to achieve and maintain specified ratios of capital to risk-weighted assets. The risk-based capital rules are designed to measure Tier 1 Capital and Total Capital in relation to the credit risk of both on- and off-balance sheet items. Under the guidelines, one of four risk weights is applied to the different on-balance sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk-weighting after conversion to balance sheet equivalent amounts. All bank holding companies and banks must maintain a minimum total capital to total risk-weighted assets ratio of 8.00%, at least half of which must be in the form of core, or Tier 1, capital (consisting of common equity, retained earnings, and a limited amount of qualifying perpetual preferred stock and trust preferred securities, net of goodwill and other intangible assets and accumulated other comprehensive income). These guidelines also specify that bank holding companies that are experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels. At June 30, 2005, the Bank and the Company each satisfied their respective minimum regulatory capital requirements, and the Bank was “well-capitalized” within the meaning of federal regulatory requirements. The table below sets forth the capital position of the Bank and the Company at June 30, 2005.
 
   
Required
Minimum
Ratio
 
Required
to be
Well Capitalized
 
Bank
 
Company
 
Tier 1 risk-based capital
   
4.00
%
 
6.00
%
 
9.02
%
 
8.94
%
Total risk-based capital
   
8.00
%
 
10.00
%
 
10.27
%
 
10.19
%
Leverage Ratio
   
4.00
%
 
5.00
%
 
7.93
%
 
7.85
%
                           
The Company's proposed acquisition of five Clarksville, Tennessee bank branches from Old National Bank will require that the Company contribute additional capital to the Bank in order for the Bank to remain well-capitalized within the meaning of federal regulatory requirements. The acquisition agreement entered into by the Bank in connection with the Old National branch acquisition requires that the Company secure financing commitments no later than August 8, 2005 in the amount necessary to provide the required capital to the Bank at the closing of the transaction if the Company is unable to complete an offering of its common stock providing net proceeds sufficient to provide the necessary capital to the Bank, and to enter into a definitive credit agreement for such financing under certain circumstances.

On July 22, 2005, the Company secured a commitment from SunTrust Bank, National Association for a $35,000 line of credit, which expires on August 31, 2005 if a definitive credit agreement is not entered into by the parties and decreases to $15,000 on November 30, 2005. The Company expects that it will enter into the definitive credit agreement during August 2005 and anticipates that it will file a registration statement with the Securities and Exchange Commission in early August 2005 for an underwritten public offering of up to 1,725,000 shares of its common stock, the proceeds of which will be used to provide capital to the Bank in an amount sufficient for the Bank to remain well-capitalized following the acquisition and for other general corporate purposes. The Company anticipates that it will only access the line of credit if it is unable to consummate a public offering resulting in net proceeds in the required amount prior to the closing of the Clarksville branch acquisition.

-22-

Off-Balance Sheet Arrangements

At June 30, 2005, the Company had outstanding unused lines of credit and standby letters of credit totaling $302,080 and unfunded loan commitments outstanding of $76,048. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Company has the ability to liquidate federal funds sold or securities available-for-sale or, on a short-term basis, to borrow any then available amounts from the FHLB and/or purchase federal funds from other financial institutions. At June 30, 2005, the Company had accommodations with upstream correspondent banks for unsecured federal funds lines. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within less than a month. The following table presents additional information about the Company’s off-balance sheet commitments as of June 30, 2005, which by their terms have contractual maturity dates subsequent to June 30, 2005:

   
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 Years
 
Total
 
Commitments to make loans - fixed 
 
$
10,904
 
$
--
 
$
--
 
$
--
 
$
10,904
 
Commitments to make loans - variable. 
   
65,144
   
--
   
--
   
--
   
65,144
 
Unused lines of credit 
   
191,573
   
38,078
   
4,689
   
39,085
   
273,425
 
Letters of credit 
   
13,320
   
14,167
   
1,003
   
165
   
28,655
 
Total 
 
$
280,941
 
$
52,245
 
$
5,692
 
$
39,250
 
$
378,128
 
                                 
Disclosure of Contractual Obligations

In the ordinary course of operations, the Company enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises and equipment. The following table summarizes the Company’s significant fixed and determinable contractual obligations as of June 30, 2005:
 
   
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 Years
 
Total
 
Deposits without a stated maturity 
 
$
520,480
 
$
--
 
$
--
 
$
--
 
$
520,480
 
Certificate of deposits 
   
438,441
   
139,343
   
49,589
   
581
   
627,954
 
Repurchase agreements 
   
16,426
   
--
   
--