UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

10-K/A

(Mark One)

þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Amendment No 1)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year endedFiscal Year Ended December 31, 2010

or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number0-142892011

GREEN BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Tennessee 
Tennessee0-14289 62-122256762-12222567

(State or other jurisdiction of

incorporation or
organization)

 

(I.R.S. Employer Identification No.)

Commission

File Number)

 
100 North Main Street, Greeneville, Tennessee37743-4992

(Address of principle executive offices)

(Zip Code)I.R.S. Employer

Identification No.)

100 North Main Street

Greeneville, Tennessee 37743-4992

(Address of principal executive offices)

(423) 639-5111

(Registrant’s telephone number, including area code: (code)

423) 639-5111

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassName of each Exchange on which Registered
Common Stock — $2.00 par valueNasdaq Global Select Market

Common Stock, no par value

(Title of class)

NASDAQ Global Select Market

(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YESYes  o¨    NONo  þx

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YESYes  o¨    NONo  þx

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.    YESYes  þx    NONo  o¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yesox    Noo¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment toof this Form 10-K.ox

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filero¨  Accelerated filerþ¨
Non-accelerated filer Non-accelerated filero¨
(Do  (Do not check if a smaller reporting company)		  Smaller reporting companyox

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YESYes  o¨    NONo  þx

The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2010,2011, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $151$32 million. The market value calculation was determined using the closing sale price of the registrant’s common stock on June 30, 2010, as reported on the Nasdaq Global Select Market. For purposes of this calculation, the term “affiliate” refers to all directors, executive officers and 10% shareholders of the registrant.

As of the close of business on February 28, 2011, 13,188,896April 27, 2012 there were 133,160,384 shares outstanding of the registrant’s common stock, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents$0.01 par value.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Amendment No. 1 to Annual Report on Form 10-K that are not descriptions of historical facts are forward-looking statements that are subject to risks and uncertainties. Actual events or results could differ materially from those currently anticipated due to a number of risk factors including those described in our Form 10-K and information incorporated by referencereference. If any of these risks or other risks which have not been identified or which we may believe are immaterial or unlikely, actually occur, our business, financial condition and results or operations could be harmed. This could cause the price of our stock to decline and shareholders could lose part or all of their investment.

PARTS III AND IV

Certain information required by Part ofIII was omitted from the Company’s annual report on Form 10-K into whichfiled on April 9, 2012 (the “Annual Report”) because at the document is incorporated:

1. Portions of Proxy Statementtime the Company intended to file a definitive proxy statement for 2011its 2012 Annual Meeting of Shareholders. (Part III)
Shareholders (the “Proxy Statement”) within 120 days after the end of its fiscal year pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended. Because the Company no longer intends to file the definitive proxy statement within such 120 day period, the omitted information is filed herewith and provided below as required. In addition, in connection with the filing of this amendment and pursuant to the rules of the SEC, we are including in this amendment certain currently dated certifications. Accordingly, Item 15 of Part IV has also been amended to reflect the filing of these currently dated certifications.

This Amendment makes reference to the date of the Annual Report, and the Company has not updated or amended the disclosures contained herein to reflect events that have occurred since the filing of the Annual Report, or modified or updated the disclosures contained in the Annual Report in any way other than as specifically set forth in this Amendment. Accordingly, this Amendment should be read in conjunction with the Annual Report and other filings made by the Company with the SEC subsequent thereto.

GREEN BANKSHARES, INC.

Form 10-K/A for the Year Ended December 31, 2011

INDEX

 

TABLE OF CONTENTS

PART IIII

ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. REMOVED AND RESERVED
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EXHIBIT INDEX
Exhibit 10.51
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99.1
Exhibit 99.2

PART I
Forward-Looking Statements
The information contained herein contains forward-looking statements that involve a number of risks and uncertainties. A number of factors, including those discussed herein, could cause results to differ materially from those anticipated by such forward-looking statements which are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and data that may be incorrect or imprecise. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward-looking terminology such as “trends,” “assumptions,” “target,” “guidance,” “outlook,” “opportunity,” “future,” “plans,” “goals,” “objectives,” “expectations,” “near-term,” “long-term,” “projection,” “may,” “will,” “would,” “could,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “potential,” “regular,” or “continue” or the negatives thereof, or other variations thereon of comparable terminology, or by discussions of strategy or intentions. Such statements may include, but are not limited to, projections of revenue, income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of the Company, as well as assumptions relating to the foregoing. The Company’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors, including, but not limited to those identified in “Item 1A. Risk Factors” in this Form 10-K and (1) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (2) continuation of the historically low short-term interest rate environment; (3) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (4) increased levels of non-performing and repossessed assets and the ability to resolve these may result in future losses; (5) greater than anticipated deterioration or lack of sustained growth in the national or local economies; (6) rapid fluctuations or unanticipated changes in interest rates; (7) the impact of governmental restrictions on entities participating in the Capital Purchase Program (the “CPP”)of the United States Department of the Treasury (the “Treasury”); (8) changes in state and federal legislation, regulations or policies applicable to banks or other financial service providers, including regulatory or legislative developments, like the Dodd-Frank Wall Street Reform and Consumer Protection Act (the“Dodd-Frank Act”), arising out of current unsettled conditions in the economy (9) the results of regulatory examinations; (10) the remediation efforts related to the Company’s material weakness in its internal control over financial reporting; (11) increased competition with other financial institutions in the markets that the Bank serves; (12) the Company recording a further valuation allowance related to its deferred tax asset; (13) exploring alternatives available for the future repayment or conversion of the preferred stock issued in the CPP; (14) further deterioration in the valuation of other real estate owned (“OREO”); (15) inability to comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions to raise capital if necessary to comply with any regulatory capital requirements; and (16) the loss of key personnel. The Company undertakes no obligation to update forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements made in this document, since the statements speak only as of the document’s date. All forward-looking statements included in this Annual Report on Form 10-K are expressly qualified in their entirety by the cautionary statements in this section and to the more detailed risk factors included below under Part I, Item 1A “Risk Factors”. The Company has no obligation and does not intend to publicly update or revise any forward-looking statements contained in or incorporated by reference into this Annual Report on Form 10-K, to reflect events or circumstances occurring after the date of this document or to reflect the occurrence of unanticipated events. Readers are advised, however, to consult any further disclosures the Company may make on related subjects in its documents filed with or furnished to the Securities and Exchange Commission (“SEC”) or in its other public disclosures.

1

ITEM 1.

Item 10.

 
BUSINESS.
Presentation of Amounts
All dollar amounts set forth below, other than share and per-share amounts, are in thousands unless otherwise noted. Unless thisForm 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “the Company” or “Green Bankshares” as used herein refer to Green Bankshares, Inc. and its subsidiaries, including GreenBank, which we sometimes refer to as “GreenBank,” “the Bank” or “our Bank”.
Green Bankshares, Inc.
We are the third-largest bank holding company headquartered in Tennessee, with $2.4 billion in assets as of December 31, 2010. Incorporated in 1985, Green Bankshares is the parent of GreenBank (the “Bank”) and owns 100% of the capital stock of the Bank. The primary business of the Company is operating the Bank.
As a bank holding company, we are subject to regulation by the Board of Governors of the Federal Reserve System, or the Federal Reserve Board (the “FRB”). We are required to file reports with the Federal Reserve Bank of Atlanta (the “FRB-Atlanta”) and are subject to regular examinations by that agency. Shares of our common stock are traded on the NASDAQ Global Select Market under the trading symbol “GRNB.”
At December 31, 2010, the Company maintained a main office in Greeneville, Tennessee and 64 full-service bank branches (of which eleven are leased operating premises), a location for mortgage banking and nine separate locations operated by the Bank’s subsidiaries.
The Company’s assets consist primarily of its investment in the Bank and liquid investments. Its primary activities are conducted through the Bank. At December 31, 2010, the Company’s consolidated total assets were $2,406,040, its consolidated net loans were $1,745,378, its total deposits were $1,976,854 and its total shareholders’ equity was $143,897.
The Company’s net income, or net loss, is dependent primarily on the earnings, or loss, of its wholly-owned subsidiary, GreenBank and its level of net income, or net loss. GreenBank’s net income, or net loss, is dependent upon its level of net interest income, which is the difference between the interest income earned on its loans and other interest-earning assets and the interest paid on deposits and other interest-bearing liabilities plus the Bank’s non-interest income, the sum of which is either partially, or fully, offset by the amount of the Bank’s loan loss provision plus the Bank’s total operating expenses.
Lending Activities:
General:The Bank’s lending activities reflect its community banking philosophy, emphasizing secured loans to individuals and businesses in its primary market areas.
Commercial Real Estate Lending:Commercial real estate loans are loans originated by the Bank that are secured by commercial real estate and includes commercial real estate construction loans to developers, mainly to borrowers based in its primary markets.
Residential Real Estate Lending:The Bank originates traditional one-to-four family, owner occupied, residential mortgages secured by property located in its primary market area. Further detail on consumer residential real estate lending may be found on page 7 of this report.

2

Commercial Business Lending:Commercial business loans are loans originated by the Bank that are generally secured by various types of business assets including inventory, receivables, equipment, financial instruments and commercial real estate. In limited cases, loans may be made on an unsecured basis. Commercial business loans are used for a variety of purposes including working capital and financing the purchase of equipment.
The Bank concentrates on originating commercial business loans to middle-market companies with borrowing requirements of less than $25 million. Substantially all of the Bank’s commercial business loans outstanding at December 31, 2010, were to borrowers based in its primary markets.
Consumer Lending:The Bank makes consumer loans for personal, family or household purposes, such as debt consolidation, automobiles, vacations and education. Consumer lending loans are typically secured by personal property but may also be unsecured personal loans. They may also be made on a revolving line of credit or fixed-term basis.
Investment Activities:
The Bank has authority to invest in various types of liquid assets, including U.S. Treasury obligations and securities of various federal agencies and U.S. Government sponsored enterprises, deposits of insured banks and federal funds. The Bank’s investments do not include commercial paper, asset-backed commercial paper, asset-backed securities secured by credit cards, or car loans. The Bank also does not participate in structured investment vehicles. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the returns on loans and leases. The Bank must also meet reserve requirements of the FRB, which are imposed based on amounts on deposit in various deposit categories.
Sources of Funds:
Deposits:Deposits are the primary source of the Bank’s funds for use in lending and for other general business purposes. Deposit inflows and outflows are significantly influenced by economic and competitive conditions, interest rates, money market conditions and other factors, including depositor confidence. Consumer, small business and commercial deposits are attracted principally from within the Bank’s primary market areas through the offering of a broad selection of deposit instruments including consumer, small business and commercial demand deposit accounts, interest-bearing checking accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans.
The Bank’s marketing strategy emphasizes attracting core deposits held in checking, savings, money- market and certificate of deposit accounts. These accounts are a source of low-interest cost funds and in some cases, provide significant fee income. The composition of the Bank’s deposits has a significant impact on the overall cost of funds. At December 31, 2010, interest-bearing deposits comprised 92% of total deposits, as compared with 91% at December 31, 2009.
Borrowings:Borrowings may be used to compensate for reductions in deposit inflows or net deposit outflows, or to support expanded lending activities. These borrowings include Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, federal funds and other borrowings.
The Bank, as a member of the FHLB system, is required to own a minimum level of FHLB stock and is authorized to apply for advances on the security of such stock, mortgage-backed securities, loans secured by real estate and other assets (principally securities which are obligations of, or guaranteed by, the United States Government), provided certain standards related to creditworthiness have been met. FHLB advances are made pursuant to several different credit programs. Each credit program has its own interest rates and range of maturities. The FHLB prescribes the acceptable uses to which the advances pursuant to each program may be made as well as limitations on the size of advances. In addition to the program limitations, the amounts of advances for which an institution may be eligible are generally based on the FHLB’s assessment of the institution’s creditworthiness.

3

As an additional source of funds, the Bank may sell securities subject to its obligation to repurchase these securities (repurchase agreements) with major customers utilizing government securities or mortgage-backed securities as collateral. Generally, securities with a value in excess of the amount borrowed are required to be maintained as collateral to a repurchase agreement.
Information concerning the Bank’s FHLB advances, repurchase agreements, junior subordinated notes (trust preferred) and other borrowings is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and in Note 8 of Notes to Consolidated Financial Statements.
We are significantly impacted by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the general credit needs of individuals and small and medium-sized businesses in the Company’s market areas, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily the rates paid on competing funding alternatives, account maturities and the levels of personal income and savings in the Company’s market areas.
Our principal executive offices are located at 100 North Main Street, Greeneville, Tennessee 37743-4992 and our telephone number at these offices is (423) 639-5111. Our internet address iswww.greenbankusa.com. Please note that our website is provided as an inactive textual reference and the information on our website is not incorporated by reference herein.
GreenBank and its Subsidiaries
Our Bank is a Tennessee-chartered commercial bank established in 1890 which has its principal executive offices in Greeneville, Tennessee. The principal business of the Bank consists of attracting deposits from the general public and investing those funds, together with funds generated from operations and from principal and interest payments on loans, primarily in commercial and residential real estate loans, commercial loans and installment consumer loans. At December 31, 2010, the Bank had 63 Tennessee-based full-service banking offices located in Greene, Blount, Cocke, Hamblen, Hawkins, Knox, Loudon, McMinn, Monroe, Sullivan, and Washington Counties in East Tennessee and in Davidson, Lawrence, Macon, Montgomery, Rutherford, Smith, Sumner and Williamson Counties in Middle Tennessee. The Bank also operates two other full service branches—one located in nearby Madison County, North Carolina and the other in nearby Bristol, Virginia. Further, the Bank operates a mortgage banking operation in Knox County, Tennessee.
Our Bank also offers other financial services through three wholly-owned subsidiaries. Through Superior Financial Services, Inc. (“Superior Financial”), the Bank operates eight consumer finance company offices located in Greene, Blount, Hamblen, Washington, Sullivan, Sevier, Knox and Bradley Counties, Tennessee. Through GCB Acceptance Corporation (“GCB Acceptance”), the Bank operates a sub-prime automobile lending company with a sole office in Johnson City, Tennessee. Through Fairway Title Co., the Bank operates a title company headquartered in Knox County, Tennessee. At December 31, 2010, these three subsidiaries had total combined assets of $42,995 and total combined loans, net of unearned interest and loan loss reserve, of $40,671.
As described in more detail below, deposits of our Bank are insured by the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”). Our Bank is subject to comprehensive regulation, examination and supervision by the Tennessee Department of Financial Institutions (the “TDFI”), the FRB and the FDIC.
Business Strategy
In 2011, the Company expects that its primary business strategy will be on managing through the current asset quality issues affecting the Company’s performance and strengthening the Company’s capital position, including, if necessary, through the issuance of additional equity securities. Accordingly, the Company expects that over the short term, given the current economic environment and high levels of nonperforming assets, there will be little to no loan growth until the current economic environment in the Company’s markets stabilizes and the economy begins to improve.

4

The Company’s intermediate term prospects depend principally on the Company’s ability to deal with the asset quality issues currently facing the Company and the Company’s ability to raise capital in amounts sufficient to allow the Company and the Bank to achieve capital levels in excess of those required by federal banking regulations and the informal commitments that the Bank has made to the TDFI and FDIC described in more detail below.
The Bank had historically operated under a single bank charter while conducting business under 18 bank brands with a distinct community-based brand in almost every market. On March 31, 2007 the Bank announced that it had changed all brand names to GreenBank throughout all the communities it serves to better enhance recognition and customer convenience. The Bank continues to offer local decision making through the presence of its regional executives in each of its markets, while maintaining a cost effective organizational structure in its back office and support areas.
The Bank focuses its lending efforts predominately on individuals and small to medium-sized businesses while it generates deposits primarily from individuals in its local communities. To aid in deposit generation efforts, the Bank offers its customers extended hours of operation during the week as well as Saturday and Sunday banking in many of its markets. The Bank also offers free online banking along with its High Performance Checking Program which since its inception has generated a significant number of core transaction accounts.
In addition to the Company’s business model, which is described herein, the Company is continuously investigating and analyzing other lines and areas of business. Conversely, the Company frequently evaluates and analyzes the profitability, risk factors and viability of its various business lines and segments and, depending upon the results of these evaluations and analyses, may conclude to exit certain segments and/or business lines. Further, in conjunction with these ongoing evaluations and analyses, the Company may decide to sell, merge or close certain branch facilities.
Lending Activities
General. The loan portfolio of the Company is comprised of commercial real estate, residential real estate, commercial and consumer loans. Such loans are primarily originated within the Company’s market areas of East and Middle Tennessee and are generally secured by residential or commercial real estate or business or personal property located in its market footprint.
Loan Composition. Given the on-going challenging economic environment which began during the second half of 2007 as the recession emerged and the resulting precipitous decline in residential real estate construction values through 2010, the Company significantly reduced its commercial real estate concentration levels, as noted in the table below for each of the periods presented at December 31:
                     
  2010  2009  2008  2007  2006 
                     
Commercial real estate $1,080,805  $1,306,398  $1,430,225  $1,549,457  $921,190 
Residential real estate  378,783   392,365   397,922   398,779   281,629 
Commercial  222,927   274,346   315,099   320,264   258,998 
Consumer  75,498   83,382   89,733   97,635   87,111 
Other  1,913   2,117   4,656   3,871   2,203 
Unearned interest  (14,548)  (14,801)  (14,245)  (13,630)  (11,502)
                
Loans, net of unearned interest $1,745,378  $2,043,807  $2,223,390  $2,356,376  $1,539,629 
                
                     
Allowance for loan losses $(66,830) $(50,161) $(48,811) $(34,111) $(22,302)
                

5

In addition to the segment information listed above, the Company monitors commercial real estate speculative and construction by purpose code as noted in the loan migration table below for each of the periods presented:
Higher Risk Loan Migration Table:
                     
  2010  2009  2008  2007  2006 
                     
Speculative 1-4 family residential real estate                    
Acquisition and development $131,669  $185,087  $242,343  $285,592  $159,760 
Lot warehouse  42,796   66,104   79,555   104,201   64,429 
Commercial 1-4 family residential  31,511   70,434   160,786   279,680   134,390 
                
Sub-total  205,976   321,625   482,684   669,473   358,579 
                     
Construction                    
Commercial vacant land  77,081   101,679   103,160   69,298   37,461 
Commercial construction — non-owner occupied  63,881   164,887   144,344   157,374   80,032 
Commercial construction — owner occupied  5,407   28,213   55,305   58,814   37,515 
Consumer residential construction  14,161   19,073   27,632   38,231   25,279 
                
Sub-total  160,530   313,852   330,441   323,717   180,287 
                     
Total speculative and construction $366,506  $635,477  $813,125  $993,190  $538,866 
                
Loan Maturities. The following table reflects at December 31, 2010 the dollar amount of loans maturing based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and loans having no stated maturity are reported as due in one year or less.
                 
  Due in One  Due After One Year  Due After    
  Year or Less  Through Five Years  Five Years  Total 
                 
Commercial real estate $437,374  $613,259  $30,172  $1,080,805 
Residential real estate(1)
  42,826   93,735   235,732   372,293 
Commercial  148,500   68,752   5,675   222,927 
Consumer(1)
  19,110   45,815   2,515   67,440 
Other  1,629   236   48   1,913 
             
Total $649,439  $821,797  $274,142  $1,745,378 
             
(1)Net of unearned interest
The following table sets forth the dollar amount of the loans maturing subsequent to the year ended December 31, 2011 distinguished between those with predetermined interest rates and those with floating, or variable, interest rates.
             
  Fixed Rate  Variable Rate  Total 
             
Commercial real estate $432,141  $211,290  $643,431 
Residential real estate  111,198   218,269   329,467 
Commercial  46,740   27,687   74,427 
Consumer  47,696   634   48,330 
Other  236   48   284 
          
Total $638,011  $457,928  $1,095,939 
          
Commercial Real Estate Loans. The Company has significantly curtailed the origination of residential real estate construction and development loans over the past three years as noted in the higher risk loan migration table above. The Company had historically originated commercial real estate loans, including residential real estate construction and development loans, generally to existing business customers, secured by real estate located in the Company’s market area. At December 31, 2010, commercial real estate loans totaled $1,080,805, or 62%, of the Company’s net loan portfolio. Commercial real estate loans were generally underwritten by addressing cash flow (debt service coverage), primary and secondary source of repayment, financial strength of any guarantor, and strength of the tenant (if any), liquidity, leverage, management experience, ownership structure, economic conditions and collateral. Generally, the Company would loan up to 80-85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis.

6

Residential Real Estate. The Company also originates one-to-four family, owner-occupied residential mortgage loans secured by property located in the Company’s primary market areas. The majority of the Company’s residential mortgage loans consists of loans secured by owner-occupied, single-family residences. At December 31, 2010, the Company had $378,783, or 21%, of its net loan portfolio in residential real estate loans, net of unearned income. Residential real estate loans generally have a loan-to-value ratio of 85% or less. These loans are underwritten by giving consideration to the ability to pay, stability of employment, source of income, credit history and loan-to-value ratio. Home equity loans make up approximately 52% of residential real estate loans. Home equity loans may have higher loan-to-value ratios when the borrower’s repayment capacity and credit history conform to underwriting standards. Superior Financial extends sub-prime mortgages to borrowers who generally have a higher risk of default than mortgages extended by the Bank. Sub-prime mortgages totaled $11,742, or 3%, of the Company’s residential real estate loans, net of unearned income, at December 31, 2010.
The Company sells most of its one-to-four family mortgage loans in the secondary market to Freddie Mac and other mortgage investors through the Bank’s mortgage banking operation. Sales of such loans to Freddie Mac and other mortgage investors totaled $47,881 and $43,050 during 2010 and 2009, respectively, and the related mortgage servicing rights were sold together with the loans. All mortgage loans sales are without recourse and all notes are endorsed to the investor stating without recourse. Certain contingencies do come into play for early prepayment or early payment defaults and would involve a refund of the yield spread premium earned on the transaction given certain events of default. During 2010, no refunds or events of default occurred.
Commercial Loans. Commercial loans are made for a variety of business purposes, including working capital, inventory and equipment and capital expansion. At December 31, 2010, commercial loans outstanding totaled $222,927, or 13%, of the Company’s net loan portfolio. Such loans are usually amortized over one to seven years and generally mature within five years. Commercial loan applications must be supported by current financial information on the borrower and, where appropriate, by adequate collateral. Commercial loans are generally underwritten by addressing cash flow (debt service coverage), primary and secondary sources of repayment, financial strength of any guarantor, liquidity, leverage, management experience, ownership structure, economic conditions and industry-specific trends and collateral. The loan to value ratio depends on the type of collateral. Generally speaking, accounts receivable are financed between 70% and 80% of accounts receivable less than 90 days past due. If other collateral is taken to support the loan, the loan to value of accounts receivable may approach 85%. Inventory financing will range between 50% and 60% depending on the borrower and nature of the inventory. The Company requires a first lien position for such loans. These types of loans are generally considered to be a higher credit risk than other loans originated by the Company.
Consumer Loans. At December 31, 2010, the Company’s consumer loan portfolio, net of unearned income, totaled $67,440, or 4%, of the Company’s total net loan portfolio. The Company’s consumer loan portfolio is composed of secured and unsecured loans originated by the Bank, Superior Financial and GCB Acceptance. The consumer loans of the Bank generally have a higher risk of default than other loans originated by the Bank. Further, consumer loans originated by Superior Financial and GCB Acceptance, which are finance companies rather than banks, generally have a greater risk of default than such loans originated by commercial banks and, accordingly, carry a higher interest rate. Superior Financial and GCB Acceptance consumer loans totaled approximately $32,194, or 48%, of the Company’s installment consumer loans, net of unearned income, at December 31, 2010. The performance of consumer loans will be affected by the local and regional economy as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics.
Past Due, Special Mention, Classified and Nonaccrual Loans. The Company classifies its loans of concern into three categories: past due loans, special mention loans and classified loans (both accruing and non-accruing interest).
When management determines that a loan is no longer performing and that collection of interest appears doubtful, the loan is placed on nonaccrual status. All loans that are 90 days past due are considered nonaccrual unless they are adequately secured and there is reasonable assurance of full collection of principal and interest. Management closely monitors all loans that are contractually 90 days past due, treated as “special mention” or otherwise classified or on nonaccrual status. Nonaccrual loans that are 120 days past due without assurance of repayment are charged off against the allowance for loan losses.

7

The Company may elect to formally restructure a loan due to the weakening credit status of a borrower so that the restructuring may facilitate a repayment plan that minimizes the potential losses that the Company may have to otherwise incur. At December 31, 2010 and 2009, the Company had $49,537 and $16,061 of restructured loans of which $9,597 and $4,429 were classified as non-accrual and the remaining were performing.
The following table sets forth information with respect to the Company’s nonperforming assets at the dates indicated.
                     
  At December 31, 
  2010  2009  2008  2007  2006 
                     
Loans accounted for on a non-accrual basis $143,707  $75,411  $30,926  $32,060  $3,479 
Accruing loans which are contractually past due 90 days or more as to interest or principal payments  2,112   147   509   18   28 
                
Total non-performing loans  145,819   75,558   31,435   32,078   3,507 
Real estate owned:                    
Foreclosures  59,965   56,952   44,964   4,401   1,445 
Other real estate held and repossessed assets  130   216   407   458   243 
                
Total non-performing assets $205,914  $132,726  $76,806  $36,937  $5,195 
                
                     
Restructured loans not included above $39,940  $11,632  $—  $—  $— 
                
Total non-performing assets increased by $73,188 from December 31, 2009 to December 31, 2010. This increase was principally driven by deterioration in the economy during 2010 which was reflected principally in the Company’s residential real estate construction and development portfolio. In 2010, the Company devoted significant attention to our asset quality issues, including having segregated these assets within our Special Assets Group so that we may diligently work through the resolution of each on an asset-by-asset basis. The Special Assets Group meets monthly to discuss the performance of the portfolio and specific relationships with emphasis on the underperforming assets. The Special Assets Group is responsible for the resolution of problem credits by creating action plans, which could include foreclosure, restructuring the loan, issuing demand letters or other actions. If nonaccrual loans at December 31, 2010 had been current according to their original terms and had been outstanding throughout 2010, or since origination if originated during the year, interest income on these loans in 2010 would have been approximately $5,948. Interest actually recognized on these loans during 2010 was $4,843. Interest income not recognized on restructured loans was not significant for 2010.
OREO increased by $2,927 from December 31, 2009 to December 31, 2010. The real estate consists of 122 properties, of which 49 are 1-4 family residential properties with a carrying value of $3,966; 38 are construction development of 1-4 residential properties with a carrying value of $37,481; two are multi-family residential properties with a carrying value of $648; four are parcels of commercial vacant land with a carrying value of $3,192; 23 are vacant 1-4 family residential lots with a carrying value of $7,038; five are commercial buildings with a carrying value of $5,321; and one is a commercial construction project with a carrying value of $2,318. Management has recorded these properties at estimated fair market value, based on current appraisals, less estimated selling costs. Other repossessed assets decreased from $216 at December 31, 2009 to $130 at December 31, 2010. The decrease is due primarily to the disposition of repossessed automobiles at one of the Company’s subsidiaries.

8

The recorded investment of impaired loans, defined under Accounting Standards Codification (“ASC”) Topic ASC 310 as loans which, based upon current information and events, it is considered probable that the Company will be unable to collect all amounts of contractual interest and principal as scheduled in the loan agreement, increased by $70,753 from $115,238 at December 31, 2009 to $185,991 at December 31, 2010. The related allowance on the recorded investment of impaired loans also increased by $19,097 from $5,737 at December 31, 2009 to $24,834 at December 31, 2010. Under accounting guidance for impaired loans, the impairment is probable if the future events indicate that the Bank will not collect principal and interest in accordance with contractual terms. Impaired loans are included in non-performing loans. This increase is primarily attributable to the continued deterioration throughout 2010 in residential real estate construction loans located in the Company’s urban markets. The recorded investment of impaired loans of $185,991 at December 31, 2010 and $115,238 at December 31, 2009 are net of balances previously charged-off of $36,574 and $27,937 respectively.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level which management believes is adequate to absorb all probable losses on loans then present in the loan portfolio. The amount of the allowance is affected by: (1) loan charge-offs, which decrease the allowance; (2) recoveries on loans previously charged-off, which increase the allowance; and (3) the provision for possible loan losses charged against income, which increases the allowance. In determining the provision for possible loan losses, it is necessary for management to monitor fluctuations in the allowance resulting from actual charge-offs and recoveries, and to periodically review the size and composition of the loan portfolio in light of current and anticipated economic conditions, including residential real estate prices and transaction volume in the Company’s market areas, in an effort to evaluate portfolio risks. In evaluating residential real estate market conditions, the Company’s internal policies require new appraisals on adversely rated collateral dependent loans to be obtained at least annually. On a quarterly basis, the Company receives a written report from an independent nationally recognized organization which provides updated valuation trends, by price point and by zip code, for each of the major markets in which the Company is conducting business. The information is then used in the Company’s impairment analysis of collateral dependent loans. If actual losses exceed the amount of the allowance for loan losses, earnings of the Company could be adversely affected. The amount of the provision is based on management’s judgment of those risks. During the year ended December 31, 2010, the Company’s provision for loan losses increased by $20,861 to $71,107 from $50,246 for the year ended December 31, 2009 and the allowance for loan losses increased by $16,669 to $66,830 at December 31, 2010 from $50,161 at December 31, 2009.
The elevated allowance for loan losses was attributable primarily to continuing weakened economic conditions experienced in the Company’s urban markets, principally the Nashville and Knoxville markets, beginning in the fourth quarter of 2007 and continuing through 2010, accompanied by deteriorating credit quality associated primarily with residential real estate construction and development loans in these markets. The allowance for loan losses as a percentage of total loans was 3.83% at the end of 2010 versus 2.45% at December 31, 2009. The loan loss reserves reflected the higher level of non-performing banking assets, and losses inherent in this segment of the Company’s business, as noted in Notes 3 and 17 of Notes to Consolidated Financial Statements. Although Management believes that the allowance for loan losses is adequate to cover estimated losses inherent in the portfolio, there can be no assurances that additional reserves may not be required in the future.

9

The following is a summary of activity in the allowance for loan losses for the periods indicated:
                     
  Year Ended December 31, 
  2010  2009  2008  2007  2006 
                     
Balance at beginning of year $50,161  $48,811  $34,111  $22,302  $19,739 
Reserve acquired in acquisition  —   —   —   9,022   — 
                
Subtotal  50,161   48,811   34,111   31,324   19,739 
Charge-offs:                    
Commercial real estate  (48,617)  (40,893)  (28,759)  (7,516)  (494)
Commercial  (3,210)  (6,941)  (6,177)  (2,065)  (879)
                
Subtotal  (51,827)  (47,834)  (34,936)  (9,581)  (1,373)
                     
Residential real estate  (3,102)  (3,176)  (2,275)  (840)  (947)
Consumer  (2,889)  (3,880)  (4,058)  (3,050)  (2,009)
Other  —   —   —   —   (28)
                
Total charge-offs  (57,818)  (54,890)  (41,269)  (13,471)  (4,357)
                
                     
Recoveries:                    
Commercial real estate  1,301   3,066   1,691   289   17 
Commercial  909   1,669   221   227   171 
                
Subtotal  2,210   4,735   1,912   516   188 
                     
Residential real estate  287   402   138   213   284 
Consumer  882   853   1,106   1,038   936 
Other  1   4   3   8   5 
                
Total recoveries  3,380   5,994   3,159   1,775   1,413 
                
Net charge-offs  (54,438)  (48,896)  (38,110)  (11,696)  (2,944)
 
Provision for loan losses  71,107   50,246   52,810   14,483   5,507 
                
Balance at end of year $66,830  $50,161  $48,811  $34,111  $22,302 
                
                     
Ratio of net charge-offs to average loans outstanding, net of unearned discount, during the period  2.84%  2.25%  1.63%  .57%  .20%
                
Ratio of allowance for loan losses to non-performing loans  45.83%  66.39%  155.28%  106.34%  635.93%
                
Ratio of allowance for loan losses to total loans, net of unearned income  3.83%  2.45%  2.20%  1.45%  1.45%
                
Breakdown of allowance for loan losses by portfolio segment.The following table presents an allocation among the listed loan categories of the Company’s allowance for loan losses at the dates indicated and the percentage of loans in each category to the total amount of loans at the respective year-ends:
                                         
  At December 31, 
  2010  2009  2008  2007  2006 
      Percent of      Percent of      Percent of      Percent of      Percent of 
      loans in      loans in      loans in      loans in      loans in 
      each      each      each      each      each 
      category      category      category      category      category 
Balance at end of period     to total      to total      to total      to total      to total 
applicable to: Amount  loans  Amount  loans  Amount  loans  Amount  loans  Amount  loans 
                                         
Commercial real estate $54,203   61.93% $36,527   63.93% $35,714   64.33% $20,489   65.38% $10,619   59.38%
Residential real estate  4,431   21.33%  4,350   18.88%  3,669   17.63%  2,395   16.83%  1,639   18.16%
Commercial  5,080   12.78%  5,840   13.42%  6,479   14.17%  7,575   13.51%  6,645   16.70%
Consumer  3,108   3.86%  3,437   3.67%  2,927   3.66%  3,635   4.12%  3,384   5.62%
Other  8   0.11%  7   0.10%  22   0.21%  17   0.16%  15   0.14%
                               
                                         
Totals $66,830   100.00% $50,161   100.00% $48,811   100.00% $34,111   100.00% $22,302   100.00%
                               

10

Investment Activities
General. The Company maintains a portfolio of investments for general liquidity purposes and to cover minimum pledging requirements for municipal deposits and borrowings.
Securities by Category. The following table sets forth the carrying value of the securities, by major categories, held by the Company at December 31, 2010, 2009 and 2008:
             
  At December 31, 
  2010  2009  2008 
             
Securities Held to Maturity:            
State and political subdivisions $215  $251  $404 
Other securities  250   375   253 
          
             
Total $465  $626  $657 
          
             
Securities Available for Sale:            
U.S. government agencies $83,299  $52,048  $98,806 
State and political subdivisions  31,501   32,192   31,804 
Collateralized mortgage obligations  67,575   44,677   68,373 
Mortgage-backed securities  17,964   16,892   2,086 
Trust preferred securities  1,663   1,915   2,493 
          
             
Total $202,002  $147,724  $203,562 
        �� 
Maturity Distributions of Securities. The following table sets forth the distributions of maturities of securities at amortized cost as of December 31, 2010:
                     
      Due After One          
  Due in One  Year through  Due After Five Years  Due    
  Year or Less  Five Years  through 10 Years  After 10 Years  Total 
 
Securities Held to Maturity:                    
State and political subdivisions $215  $—  $—  $—  $215 
Other securities  250   —   —   —   250 
                     
Securities Available for Sale:                    
U.S. government agencies  —   —   39,004   45,102   84,106 
State and political subdivisions  1,005   4,067   21,986   4,133   31,191 
Collateralized mortgage obligations  —   651   1,584   63,809   66,044 
Mortgage-backed securities  —   5,989   4,012   7,167   17,168 
Trust preferred securities  —   —   —   1,850   1,850 
                
                     
Subtotal $1,470  $10,707  $66,586  $122,061  $200,824 
                     
Market value adjustment on available for sale securities  3   535   554   553   1,645 
                
                     
Total $1,473  $11,242  $67,140  $122,614  $202,469 
                
                     
Weighted average yield (a)  7.08%  4.83%  3.94%  3.44%  3.75%
                
(a)Weighted average yields on tax-exempt obligations have been computed on a fully taxable-equivalent basis using a tax rate of 35%.
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

11

Deposits
Deposits are the primary source of funds for the Company. Such deposits consist of noninterest bearing and interest-bearing demand deposit accounts, regular savings deposits, Money Market accounts and market rate certificates of deposit. Deposits are attracted from individuals, partnerships and corporations in the Company’s market areas. In addition, the Company obtains deposits from state and local entities and, to a lesser extent, U.S. Government and other depository institutions. The Company’s Asset/Liability Management Policy permits the acceptance of limited amounts of brokered deposits. At December 31, 2010 the percentage of the Company’s brokered deposits to total deposits was 0.07%, which was within the limits of the Asset/Liability Management Policy. The Company’s brokered deposits were also within the limits of the Asset/Liability Management Policy at December 31, 2009 and 2008, respectively.
The following table sets forth the average balances and average interest rates based on daily balances for deposits for the periods indicated:
                         
  Year Ended December 31, 
  2010  2009  2008 
  Average  Average  Average  Average  Average  Average 
  Balance  Rate Paid  Balance  Rate Paid  Balance  Rate Paid 
                         
Types of deposits (all in domestic offices):                        
Noninterest bearing demand deposits $166,814   —  $162,765   —  $187,058   — 
Interest-bearing demand deposits  881,978   1.01%  700,586   1.30%  577,024   1.57%
Savings deposits  98,900   1.02%  83,549   1.13%  68,612   .77%
Time deposits  841,458   2.20%  1,166,640   3.06%  1,317,362   3.68%
                      
Total deposits $1,989,150      $2,113,540      $2,150,056     
                      
The following table indicates the amount of the Company’s certificates of deposit and brokered certificates of deposit of $100 or more by time remaining until maturity as of December 31, 2010:
     
  Certificates of 
Maturity Period Deposits 
 
Three months or less $41,190 
Over three through six months  43,741 
Over six through twelve months  112,097 
Over twelve months  112,673 
    
Total $309,701 
    

12

Competition
The Company seeks to compete effectively through its reliance on local commercial activity; personal contacts by its directors, officers, other employees and shareholders; personalized services; and its reputation in the communities it serves.
According to data as of June 30, 2010 published by SNL Financial LC and using information from the FDIC, the Bank ranked as the largest independent commercial bank headquartered in East Tennessee, and its major market areas include Greene, Blount, Davidson, Hamblen, Hawkins, Knox, Lawrence, Loudon, Macon, McMinn, Montgomery, Rutherford, Smith, Sullivan, Sumner, Washington and Williamson Counties, Tennessee and portions of Cocke and Monroe Counties, Tennessee. In Greene County, in which the Company enjoyed its largest deposit share as of June 30, 2010, there were seven commercial banks and one savings bank, operating 26 branches and holding an aggregate of approximately $1.0 billion in deposits as of June 30, 2010. The following table sets forth the Bank’s deposit share, excluding credit unions, in each county in which it has a full-service branch(s) as of June 30, 2010, according to data published by the FDIC:
Directors, Executive Officers and Corporate Governance   3  
County

Item 11.

 Deposit Share
Greene, TNExecutive Compensation   28.726%
Hawkins, TN

Item 12.

Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters   19.3612%
Lawrence, TN

Item 13.

Certain Relationships and Related Transactions, and Director Independence   17.5313%
Smith, TN

Item 14.

Principal Accounting Fees and Services   10.58%
Sumner, TN10.12%
Hamblen, TN8.78%
Blount, TN8.15%
Cocke, TN8.15%
Macon, TN7.10%
Madison, NC6.66%
Montgomery, TN6.36%
Loudon, TN6.00%
Washington, TN5.91%
McMinn, TN5.63%
Bristol, VA1
4.39%
Sullivan, TN2.82%
Williamson, TN2.80%
Rutherford, TN2.62%
Monroe, TN1.49%
Knox, TN0.82%
Davidson, TN0.79%
15  
1Bristol, VA is deemed a city.
Employees
As of December 31, 2010 the Company employed 730 full-time equivalent employees. None of the Company’s employees are presently represented by a union or covered under a collective bargaining agreement. Management considers relations with employees to be good.

13

Regulation, Supervision and Governmental Policy
The following is a brief summary of certain statutes, rules and regulations affecting the Company and the Bank. A number of other statutes and regulations have an impact on their operations. These laws and regulations are generally intended to protect depositors and borrowers, not shareholders. The following discussion describes the material elements of the regulatory framework that currently apply. In July 2010, the Dodd-Frank Act was signed into law, incorporating numerous financial institution regulatory reforms. Many of these reforms will be implemented over the course of 2011 through regulations to be adopted by various federal banking and securities regulations. The following summary of applicable statutes and regulations does not purport to be complete and is qualified in its entirety by reference to such statutes and regulations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act implements far-reaching reforms of major elements of the financial landscape, particularly for larger financial institutions. Many of its most far-reaching provisions do not directly impact community-based institutions like the Company. For instance, provisions that regulate derivative transactions and limit derivatives trading activity of federally-insured institutions, enhance supervision of “systemically significant” institutions, impose new regulatory authority over hedge funds, limit proprietary trading by banks, and phase-out the eligibility of trust preferred securities for Tier 1 capital are among the provisions that do not directly impact the Company either because of exemptions for institutions below a certain asset size or because of the nature of the Company’s operations. Those provisions that will impact the Company include the following:
Changing the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminating the ceiling and increasing the size of the floor of the DIF, and offsetting the impact of the increase in the minimum floor on institutions with less than $10 billion in assets;
Making permanent the $250,000 limit for federal deposit insurance, increasing the cash limit of Securities Investor Protection Corporation protection to $250,000 and providing unlimited federal deposit insurance until December 31, 2012 for non-interest bearing demand transaction accounts at all insured depository institutions;
Repealing the federal prohibition on payment of interest on demand deposits, thereby permitting depositing institutions to pay interest on business transaction and other accounts;
Centralizing responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing federal consumer protection laws, although banks below $10 billion in assets will continue to be examined and supervised for compliance with these laws by their federal banking regulator;
Restricting the preemption of state law by federal law and disallowing national bank subsidiaries from availing themselves of such preemption;
Imposing new requirements for mortgage lending, including new minimum underwriting standards, prohibitions on certain yield-spread compensation to mortgage originators, special consumer protections for mortgage loans that do not meet certain provision qualifications, prohibitions and limitations on certain mortgage terms and various new mandated disclosures to mortgage borrowers;
Applying the same leverage and risk based capital requirements that apply to insured depository institutions to holding companies, although the Company’s currently outstanding subordinated debentures (but not new issuances) will continue to qualify as Tier 1 capital, subject to existing limitations on the amount that may so qualify;
Permitting national and state banks to establish de novo interstate branches at any location where a bank based in that state could establish a branch, and requiring that bank holding companies and banks be well capitalized and well managed in order to acquire banks located outside their home state;
Imposing new limits on affiliated transactions and causing derivative transactions to be subject to lending limits; and
Implementing corporate governance revisions, including with regard to executive compensation and proxy access to shareholders, that apply to all public companies not just financial institutions.

14

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, and their impact on the Company or the financial industry is difficult to predict before such regulations are adopted.
Bank Holding Company Regulation. The Company is registered as a bank holding company under the Bank Holding Company Act (the “Holding Company Act”) and, as such, is subject to supervision, regulation and examination by the Board of Governors of the FRB.
Acquisitions and Mergers. Under the Holding Company Act, a bank holding company must obtain the prior approval of the FRB before (1) acquiring direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. Also, any company must obtain approval of the FRB prior to acquiring control of the Company or the Bank. For purposes of the Holding Company Act, “control” is defined as ownership of more than 25% of any class of voting securities of a bank holding company or bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the a bank holding company or bank. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:
The bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934; or
No other person owns a greater percentage of that class of voting securities immediately after the transaction.
Our common stock is registered under Section 12 of the Securities Exchange Act of 1934. The regulations provide a procedure for challenge of the rebuttable control presumption.
The Change in Bank Control Act and the related regulations of the FRB require any person or persons acting in concert (except for companies required to make application under the Holding Company Act), to file a written notice with the FRB before such person or persons may acquire control of a bank holding company or bank. The Change in Bank Control Act defines “control” as the power, directly or indirectly, to vote 25% or more of any voting securities or to direct the management or policies of a bank holding company or an insured bank.
Bank holding companies like the Company are currently prohibited from engaging in activities other than banking and activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. The FRB’s regulations contain a list of permissible nonbanking activities that are closely related to banking or managing or controlling banks. A bank holding company must file an application or notice with the FRB prior to acquiring more than 5% of the voting shares of a company engaged in such activities. The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”), however, greatly broadened the scope of activities permissible for bank holding companies. The GLB Act permits bank holding companies, upon election and classification as financial holding companies, to engage in a broad variety of activities “financial” in nature. The Company has not filed an election with the FRB to be a financial holding company, but may choose to do so in the future.
Capital Requirements. The Company is also subject to FRB guidelines that require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. The Dodd-Frank Act extended additional capital requirements to bank holding companies on a consolidated basis. See “Capital Requirements.”
Dividends. The FRB has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The FRB has issued a policy statement expressing its view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.

15

The Company is a legal entity separate and distinct from the Bank. Over time, the principal source of the Company’s cash flow, including cash flow to pay interest to its holders of trust preferred securities and dividends to holders of the Series A preferred stock the Company issued to the U.S. Treasury in connection with the Capital Purchase Program (“CPP”) and to the Company’s common stock shareholders, will be dividends that the Bank pays to the Company as its sole shareholder. Under Tennessee law, the Company is not permitted to pay dividends if, after giving effect to such payment, the Company would not be able to pay its debts as they become due in the normal course of business or the Company’s total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if the Company were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, the Company’s board of directors must consider the Company’s current and prospective capital, liquidity, and other needs.
In addition to the limitations on the Company’s ability to pay dividends under Tennessee law, the Company’s ability to pay dividends on its common stock is also limited by the Company’s participation in the CPP, by certain statutory or regulatory limitations and by an informal commitment the Company has made to the FRB-Atlanta that it will not pay dividends on its common or preferred stock (or interest on its subordinated debentures) without the prior approval of the FRB-Atlanta. The Company also informally committed to the FRB-Atlanta that it will not incur any indebtedness or repurchase any shares of its capital stock without the prior approval of the FRB-Atlanta. Prior to December 23, 2011, unless the Company has redeemed the Series A preferred stock issued to the U.S. Treasury in the CPP or the U.S. Treasury has transferred the Series A preferred stock to a third party, the consent of the U.S. Treasury must be received before the Company can declare or pay any dividend or make any distribution on the Company’s common stock in excess of $0.13 per quarter. Furthermore, if the Company is not current in the payment of quarterly dividends on the Series A preferred stock, it cannot pay dividends on its common stock. These dividend restrictions resulting from the Company’s participation in the CPP are in addition to those resulting from the Company’s informal commitment to the FRB-Atlanta.
Statutory and regulatory limitations also apply to the Bank’s payment of dividends to the Company. Under Tennessee law, the Bank can only pay dividends to the Company in an amount equal to or less than the total amount of its net income for that year combined with retained net income for the preceding two years. Payment of dividends in excess of this amount requires the consent of the Commissioner of the TDFI (the “Commissioner”). Because the Bank incurred a loss in both 2010 and 2009, dividends from the Bank to the Company, including, if necessary, dividends to support the Company’s payment of interest on its subordinated debt and dividends on the Series A preferred stock it sold to the U.S. Treasury will require prior approval by the Commissioner.
The payment of dividends by the Bank and the Company may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. Recent supervisory guidance from the FRB indicates that bank holding companies that are participants in the CPP that are experiencing financial difficulty generally should eliminate, reduce or defer dividends on Tier 1 capital instruments including trust preferred securities, preferred stock or common stock, if the holding company needs to conserve capital for safe and sound operation and to serve as a source of strength to its subsidiaries.
On November 9, 2010, following consultation with the FRB-Atlanta, the Company notified the U.S. Treasury that the Company was suspending the payment of regular quarterly cash dividends on the Series A preferred stock issued to the U.S. Treasury The dividends, which are cumulative, will continue to be reported as a preferred dividend requirement that is deducted from net income for financial statement purposes. Additionally, following consultation with the FRB-Atlanta, the Company has exercised its rights to defer regularly scheduled interest payments on all of its issues of junior subordinated notes having an outstanding principal amount of $88.6 million, relating to outstanding trust preferred securities (“TRUPs”). Under the terms of the trust documents, the Company may defer payments of interest for up to 20 consecutive quarterly periods without triggering an event of default. During a deferral period, the Company may not pay dividends on its common or preferred stock or interest on indebtedness that rankspari passuor junior to the subordinated debentures. The regular scheduled interest payments will continue to be accrued for payment in the future and reported as an expense for financial statement purposes. Together, the deferral of interest payments on TRUPs and suspension of dividend payments to the U.S. Treasury will preserve about $5.1 million per year in cash flow.

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Support of Banking Subsidiaries. Under the Dodd-Frank Act, and previously under FRB policy, the Company is expected to act as a source of financial strength to the Bank and, where required, to commit resources to support the Bank. This support can be required at times when it would not be in the best interest of the Company’s shareholders or creditors to provide it. Further, if the Bank’s capital levels were to fall below minimum regulatory guidelines, the Bank would need to develop a capital plan to increase its capital levels and the Company would be required to guarantee the Bank’s compliance with the capital plan in order for such plan to be accepted by the federal regulatory authority. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee and entitled to a priority of payment.
Under the “cross guarantee” provisions of the Federal Deposit Insurance Act (the “FDI Act”), any FDIC-insured subsidiary of the Company such as the Bank could be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of any other FDIC-insured subsidiary also controlled by the Company or (ii) any assistance provided by the FDIC to any FDIC-insured subsidiary of the Company in danger of default.
Transactions with Affiliates. The Federal Reserve Act, as amended by Regulation W, imposes legal restrictions on the quality and amount of credit that a bank holding company or its non-bank subsidiaries (“affiliates”) may obtain from bank subsidiaries of the holding company. For instance, these restrictions generally require that any such extensions of credit by a bank to its affiliates be on non-preferential terms and be secured by designated amounts of specified collateral. Further, a bank’s ability to lend to its affiliates is limited to 10% per affiliate (20% in the aggregate to all affiliates) of the bank’s capital and surplus.
Bank Regulation. As a federally-insured, Tennessee banking institution, the Bank is subject to regulation, supervision and regular examination by the TDFI and the FDIC. Tennessee and federal banking laws and regulations control, among other things, required reserves, investments, loans, mergers and consolidations, issuance of securities, payment of dividends, and establishment of branches and other aspects of the Bank’s operations. Supervision, regulation and examination of the Company and the Bank by the bank regulatory agencies are intended primarily for the protection of depositors rather than for the Company’s security holders.
Extensions of Credit. Under joint regulations of the federal banking agencies, including the FDIC, banks must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards, including loan-to-value limits that are clear and measurable, loan administration procedures and documentation, approval and reporting requirements. A bank’s real estate lending policy must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the “Interagency Guidelines”) that have been adopted by the federal banking regulators. The Interagency Guidelines, among other things, call upon depository institutions to establish internal loan-to-value limits for real estate loans that are not in excess of the loan-to-value limits specified in the Interagency Guidelines for the various types of real estate loans. The Interagency Guidelines state that it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits. The aggregate amount of loans in excess of the supervisory loan-to-value limits, however, should not exceed 100% of total capital, and the total of such loans secured by commercial, agricultural, multifamily and other non-one-to-four family residential properties should not exceed 30% of total capital.

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Federal Deposit Insurance. The deposits of the Bank are insured by the FDIC to the maximum extent provided by law, and the Bank is subject to FDIC deposit insurance assessments. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. In early 2006, Congress passed the Federal Deposit Insurance Reform Act of 2005, which made certain changes to the Federal deposit insurance program. These changes included merging the Bank Insurance Fund and the Savings Association Insurance Fund, increasing retirement account coverage to $250,000 and providing for inflationary adjustments to general coverage beginning in 2010, providing the FDIC with authority to set the fund’s reserve ratio within a specified range, and requiring dividends to banks if the reserve ratio exceeds certain levels. The statute grants banks an assessment credit based on their share of the assessment base on December 31, 1996, and the amount of the credit can be used to reduce assessments in any year subject to certain limitations.
Under the Dodd-Frank Act, the FDIC was required to adopt regulations that would base deposit insurance assessments on total assets less capital rather than deposit liabilities and to include off-balance sheet liabilities of institutions and their affiliates in risk-based assessments.
The Emergency Economic Stabilization Act of 2008 (“EESA”) provided for a temporary increase in the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. This increased level of basic deposit insurance was made permanent by the Dodd-Frank Act. In addition, on October 14, 2008, the FDIC instituted temporary unlimited FDIC coverage of non-interest bearing deposit transaction accounts. Following passage of the Dodd-Frank Act, an institution can provide full coverage on non-interest bearing transaction accounts until December 31, 2012. The Dodd-Frank Act also repealed the prohibition on paying interest on demand transaction accounts, but did not extend unlimited insurance protection for these accounts.
The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Safety and Soundness Standards. The FDICIA required the federal bank regulatory agencies to prescribe, by regulation, non-capital safety and soundness standards for all insured depository institutions and depository institution holding companies. The FDIC and the other federal banking agencies have adopted guidelines prescribing safety and soundness standards pursuant to FDICIA. The safety and soundness guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. Among other things, the guidelines require banks to maintain appropriate systems and practices to identify and manage risks and exposures identified in the guidelines.
Participation in the Capital Purchase Program of the Troubled Asset Relief Program. On October 3, 2008, the EESA became law. Under the Troubled Asset Relief Program (“TARP”) authorized by EESA, the U.S. Treasury established the CPP providing for the purchase of senior preferred shares of qualifying U.S. controlled banks, savings associations and certain bank and savings and loan holding companies. On December 23, 2008, the Company sold 72,278 shares of Series A preferred stock and warrants to acquire 635,504 shares of common stock to the U.S. Treasury pursuant to the CPP for aggregate consideration of $83 million. As a result of the Company’s participation in the CPP, the Company agreed to certain limitations on executive compensation. On February 17, 2009, President Obama signed into law The American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package. ARRA, which amends EESA, includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. Under ARRA, the Company is subject to additional and more extensive executive compensation limitations and corporate governance requirements. ARRA also permits the Company to redeem the preferred shares it sold to the U.S. Treasury without penalty and without the need to raise new capital, subject to the U.S. Treasury’s consultation with the Company’s and the Bank’s appropriate regulatory agency.

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For as long as the U.S. Treasury owns any debt or equity securities of the Company issued in connection with the CPP, the Company will be required to take all necessary action to ensure that its benefit plans with respect to its senior executive officers comply in all respects with Section 111(b) of the EESA, as amended by the ARRA, and the regulations issued and in effect thereunder, including the interim final rule related to executive compensation and corporate governance issued by the U.S. Treasury on June 15, 2009 (the “IFR”). This means that, among other things, while the U.S. Treasury owns debt or equity securities issued by the Company in connection with the CPP, the Company must:
Ensure that the incentive compensation programs for its senior executive officers do not encourage unnecessary and excessive risks that threaten the value of the Company;
Implement a required clawback of any bonus or incentive compensation paid to the Company’s senior executive officers and the next twenty most highly compensated employees based on materially inaccurate financial statements or any other materially inaccurate performance metric;
Not make any bonus, incentive or retention payment to any of the Company’s five most highly compensated employees, except as permitted under the IFR;
Not make any “golden parachute payment” (as defined in the IFR) to any of the Company’s senior executive officers or next five most highly compensated employees; and
Agree not to deduct for tax purposes executive compensation in excess of $500,000 in any one fiscal year for each of the Company’s senior executive officers.
Capital Requirements. Both the Company and the Bank are required to comply with the capital adequacy standards established by the FRB, in the Company’s case, and the FDIC, in the case of the Bank. The FRB has established a risk-based and a leverage measure of capital adequacy for bank holding companies, like the Company. The Bank is also subject to risk-based and leverage capital requirements adopted by the FDIC, which are substantially similar to those adopted by the FRB for bank holding companies. In addition, the FDIC and TDFI may require state banks that are not members of the FRB, like the Bank, to maintain capital at levels higher than those required by general regulatory requirements.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.
The minimum statutory guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and other specified intangible assets. The Series A preferred stock that the Company sold to the U.S. Treasury in connection with the CPP and the TRUPs each qualifies as Tier 1 capital, and as described below will continue to qualify as Tier 1 capital following passage of the Dodd-Frank Act. Under statutory guidelines, Tier 1 capital must equal at least 4% of risk-weighted assets. Tier 2 capital generally consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. The total amount of Tier 2 capital is limited to 100% of Tier 1 capital.
In addition, the FRB has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the FRB’s risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. The guidelines also provide that bank holding companies experiencing high internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels. Furthermore, the FRB has indicated that it will consider a bank holding company’s Tier 1 capital leverage, after deducting all intangibles, and other indicators of capital strength in evaluating proposals for expansion or new activities.
In late 2010, the Basel Committee on Banking Supervision issued Basel III, a new capital framework for banks and bank holding companies. If implemented in the United States, Basel III will impose a stricter definition of capital, with more focus on common equity. At this time, the Company does not know whether Basel III will be implemented in the United States, and if so implemented whether it will be applicable to the Company and the Bank, because by its terms it is applicable only to internationally active banks. But, if Basel III is implemented in the United States and becomes applicable to the Company, the Company and the Bank would likely be subject to higher minimum capital ratios than those to which the Company and the Bank are currently subject.

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Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution (like those that the Bank has informally agreed with the TDFI and FDIC that it will maintain) could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits and other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.
Additionally, the Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) into one of which all institutions are placed. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.
An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution and a lower capital category based on supervisory factors other than capital. As of December 31, 2010, the Bank would be considered “well capitalized” under the FDIC’s prompt corrective action provisions; however, the Bank has informally committed to the TDFI and the FDIC that it will maintain a Tier 1 leverage ratio of not less than 10% and a Total risk-based capital ratio of not less than 14%. Because of the significant losses that the Bank incurred in the second half of 2010, the Bank’s capital levels fell below these required minimum levels at December 31, 2010. At December 31, 2010, the Bank’s Tier 1 leverage ratio was 8.88% and its ratio of Total capital to risk-weighted assets was 13.22%.
Because the Bank’s capital levels at December 31, 2010 were below those that the Bank had informally committed to its primary regulators that it would maintain, the Bank was required to submit a Capital Action Plan to its primary regulators.
The Dodd-Frank Act contains a number of provisions dealing with capital adequacy of insured depository institutions and their holding companies, and for the most part will result in insured depository institutions and their holding companies being subject to more stringent capital requirements. Under the so-called Collins Amendment to the Dodd-Frank Act, federal regulators were directed to establish minimum leverage and risk-based capital requirements for, among other entities, banks and bank holding companies on a consolidated basis. These minimum requirements can’t be less than the generally applicable leverage and risk-based capital requirements established for insured depository institutions nor quantitatively lower than the leverage and risk-based capital requirements established for insured depository institutions that were in effect as of the date that the Dodd-Frank Act was enacted. These requirements in effect create capital level floors for bank holding companies similar to those in place currently for insured depository institutions. The Collins Amendment also excludes trust preferred securities issued after May 19, 2010 from being included in Tier 1 capital unless the issuing company is a bank holding company with less than $500 million in total assets. Trust preferred securities issued prior to that date will continue to count as Tier 1 capital for bank holding companies with less than $15 billion in total assets, and such securities will be phased out of Tier 1 capital treatment for bank holding companies with over $15 billion in total assets over a three-year period beginning in 2013. The Collins Amendment did not exclude preferred stock issued to the U.S. Treasury through the CPP from Tier 1 capital treatment. Accordingly, the Company’s TRUPs and Series A preferred stock issued to the U.S. Treasury through the CPP will continue to qualify as Tier 1 capital.

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More information concerning the Company’s, and the Bank’s, regulatory capital ratios at December 31, 2010 is included in Note 12 to the “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report on Form 10-K.
Legislative, Legal and Regulatory Developments. The banking industry is generally subject to extensive regulatory oversight. The Company, as a publicly held bank holding company, and the Bank, as a state-chartered bank with deposits insured by the FDIC, are subject to a number of laws and regulations. Many of these laws and regulations have undergone significant change in recent years. In July 2010, the U.S. Congress passed, and President Obama signed into law, the Dodd-Frank Act, which includes significant consumer protection provisions related to residential mortgage loans that is likely to increase our regulatory compliance costs. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions and numerous other requirements. Future changes to these laws and regulations, and other new financial services laws and regulations, are likely and cannot be predicted with certainty. With the enactments of EESA, AARA and the Dodd-Frank Act and the significant amount of regulations that are to come from the passage of that legislation, the nature and extent of the future legislative and regulatory changes affecting financial institutions and the resulting impact on those institutions is very unpredictable at this time. The Dodd-Frank Act, in particular, will require that a significant number of new regulations be adopted by various financial regulatory agencies over 2011 and 2012.
USA Patriot Act. The President of the United States signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the “Patriot Act”), into law on October 26, 2001. The Patriot Act establishes a wide variety of new and enhanced ways of combating international terrorism. The provisions that affect banks (and other financial institutions) most directly are contained in Title III of the act. In general, Title III amended existing law — primarily the Bank Secrecy Act — to provide the Secretary of U.S. Treasury and other departments and agencies of the federal government with enhanced authority to identify, deter, and punish international money laundering and other crimes.
Among other things, the Patriot Act prohibits financial institutions from doing business with foreign “shell” banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions will have to follow new minimum verification of identity standards for all new accounts and will be permitted to share information with law enforcement authorities under circumstances that were not previously permitted. These and other provisions of the Patriot Act became effective at varying times and the Treasury and various federal banking agencies are responsible for issuing regulations to implement the new law.
Additional Information
The Company maintains a website at www.greenbankusa.com and is not including the information contained on this website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. The Company makes available free of charge (other than an investor’s own internet access charges) through its website its Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the SEC.

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ITEM 1A.

PART IV

 
RISK FACTORS.
Investing in our common stock involves various risks which are particular to our company, our industry and our market area. Several risk factors regarding investing in our common stock are discussed below. This listing should not be considered as all-inclusive. If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our financial condition or operating results could be negatively impacted. These matters could cause the trading price of our common stock to decline in future periods.
We could sustain additional losses if our asset quality declines further.
Our earnings are affected by general economic conditions, economic conditions within our markets, loan concentrations and our ability to properly originate, underwrite and service loans. We could sustain additional losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. Recent problems with asset quality, particularly within the commercial real estate segment of our loan portfolio, have caused, and could continue to cause, our interest income and net interest margin to decrease and our provisions for loan losses and noninterest expenses to increase, which could continue to adversely affect our results of operations and financial condition. Further increases in non-performing loans would reduce net interest income below levels that would exist if such loans were performing.
Our loan portfolio includes an elevated, although shrinking level, of residential construction and land development loans, which loans have a greater credit risk than residential mortgage loans.
The Company engages in both traditional single-family residential lending and residential construction and land development lending to developers. The percentage of speculative 1-4 family loans to developers plus construction and land development loans to developers in the Bank’s portfolio was approximately 21.9% at December 31, 2010 compared to 31.1% of total loans at December 31, 2009. This type of lending is generally considered to have relatively high credit risks because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and operation of the related real estate project. Consequently, the credit quality of many of these loans have deteriorated as a result of the current adverse conditions in the real estate market within our markets. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline. A continued reduction in residential real estate market prices and demand could result in further price reductions in home and land values adversely affecting the value of collateral securing the construction and development loans that we hold. These adverse economic and real estate market conditions may lead to further increases in non-performing loans and other real estate owned, increased losses and expenses from the management and disposition of non-performing assets, increases in provision for loan losses, and increases in operating expenses as a result of the allocation of management time and resources to the collection and work out of these loans, all of which would negatively impact our financial condition and results of operations.
Furthermore, during adverse general economic conditions, such as we believe are now being experienced in residential real estate construction nationwide, borrowers involved in the residential real estate construction and development business may suffer above normal financial strain. Throughout 2010, the number of newly constructed homes or lots sold in our market areas has continued to decline, but at a lesser rate than experienced in 2009, negatively affecting collateral values. As the residential real estate development and construction market in our markets has deteriorated, our borrowers in this segment have experienced difficulty repaying their obligations to us. As a result, our loans to these borrowers have deteriorated and may deteriorate further and may result in additional charge-offs negatively impacting our results of operations.
Additionally, to the extent repayment is dependent upon the sale of newly constructed homes or of lots, such sales are likely to be at lower prices or at a slower rate than as expected when the loan was made, which may result in such loans being placed on non-accrual status and subject to higher loss estimates even if the borrower keeps interest payments current. These adverse economic and real estate market conditions may lead to further increases in non-performing loans and other real estate owned, increased charge-offs from the disposition of non-performing assets, and increases in provision for loan losses, all of which would negatively impact our financial condition and results of operations.
Negative developments in the U.S. and local economy and in local real estate markets have adversely impacted our operations and results and may continue to adversely impact our results in the future.
Economic conditions in the markets in which we operate deteriorated significantly between early 2008 and the second half of 2010. As a result, we incurred significant losses in 2008, 2009 and 2010. These challenges resulted primarily from provisions for loan losses related to declining collateral values in our construction and development loan portfolio plus rising OREO related costs associated with the holding and disposition of these assets. Although the FRB has issued statements that economic data suggests strongly that the recession ended in the latter half of 2009, we believe that this difficult economic environment will continue at least into the second half of 2011, and we expect that our results of operations will continue to be negatively impacted as a result. There can be no assurance that the economic conditions that have adversely affected the financial services industry, and the capital, credit and real estate markets generally or us in particular, will improve materially, or at all, in the near future, or thereafter, in which case we could continue to experience significant losses and write-downs of assets, and could face capital and liquidity constraints or other business challenges.

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Negative developments in the financial services industry and U.S. and global credit markets may adversely impact our operations and results.
Negative developments beginning in 2008 and continuing into 2010 in the capital markets have resulted in uncertainty in the financial markets in general with the expectation of the general economic downturn continuing into 2011. Loan portfolio performances have deteriorated at many institutions resulting from, amongst other factors, a weak economy and a decline in the value of the collateral supporting their loans. The competition for our deposits has increased significantly due to liquidity concerns at many of these same institutions. Stock prices of bank holding companies have been negatively affected by the current condition of the financial markets, as has our ability, if needed, to raise capital at reasonable prices or borrow in the debt markets compared to recent years.
Our business is subject to the success of the local economies where we operate.
Our success significantly depends upon the growth in population, income levels, deposits, residential real estate stability and housing starts in our market areas. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. Adverse economic conditions in our specific market areas could cause us to continue to experience negative, or limited, growth, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.
Continued adverse market or economic conditions in the state of Tennessee generally, and in our markets specifically, may increase the risk that our borrowers will be unable to timely make their loan payments. In addition, the market value of the real estate securing loans as collateral has been and may continue to be adversely affected by continued unfavorable changes in market and economic conditions. As of December 31, 2010, approximately 47% of our loans held for investment were secured by non-owner occupied commercial real estate. Of this amount, approximately 26% were speculative 1-4 residential construction and land development loans to developers, 21% were commercial construction and development loans and 53% were non-owner occupied commercial real estate loans. We experienced increased payment delinquencies with respect to these loans throughout 2009 and 2010 which negatively impacted our results of operations and a sustained period of increased payment delinquencies, foreclosures or losses caused by continuing adverse market or economic conditions in the state of Tennessee generally, and in our markets specifically, could adversely affect the value of our assets, revenues, results of operations and financial condition.
An inadequate allowance for loan losses would reduce our earnings.
The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and takes a charge against earnings with respect to specific loans when their ultimate collectability is considered questionable.

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If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, or if the bank regulatory authorities require us to increase our allowance for loan losses as a part of their examination process additional provision expense would be incurred and our earnings and capital could be significantly and adversely affected. Moreover, additions to the allowance may be necessary based on changes in economic and real estate market conditions, new information regarding existing loans or borrowers, identification of additional problem loans and other factors, both within and outside of our management’s control. These additions may require increased provision expense which would negatively impact our results of operations.
The Company’s policy requires new appraisals on adversely rated collateral dependent loans to be obtained at least annually. On a quarterly basis, the Company receives a written report from an independent nationally recognized organization which provides updated valuation trends, by price point and by zip code, for each of the major markets in which the Company is conducting business. The information obtained is then used in the Company’s impaired loan analysis of collateral dependent loans and potentially could impact the allowance for loan losses.
We, or our bank subsidiary, may become subject to supervisory actions and/or enhanced regulation that could have an additional material negative effect on our business, operating flexibility, financial condition and the value of our common stock. In addition, addressing regulatory concerns in this market environment will require significant time and attention from our management team, which may increase our costs, impede the efficiency of our internal business processes and adversely affect our profitability in the near-term.
Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, the FRB (for bank holding companies), the TDFI (for Tennessee-chartered banks) and, separately, the FDIC (as the insurer of bank deposits), have the authority to compel or restrict certain actions on our part, or the part of the Bank, if they determine that we, or the Bank, have insufficient capital or are otherwise operating in a manner that may be deemed to be inconsistent with safe and sound banking practices. Under this authority, our, and the Bank’s regulators can require us to enter into informal or formal enforcement orders, including board resolutions, memoranda of understanding, written agreements and consent or cease and desist orders, pursuant to which we, or the Bank, would be required to take identified corrective actions to address cited concerns and to refrain from taking certain actions. For additional information relating to the extensive regulation, supervision and legislation that govern most aspects of our operations and limit the businesses in which we engage, please see “Regulation, Supervision and Governmental Policy” beginning on page 14.
In light of declining asset quality and earnings in 2010, the Bank informally committed to the TDFI and the FDIC that, among other things, it would maintain a Tier 1 leverage ratio of at least 10% and Total risk-based capital ratio of at least 14%, and the Company informally committed to the FRB-Atlanta that, among other things, we would not incur any additional indebtedness, pay dividends on our common or preferred stock or pay interest on our TRUPs, without, in each case, the prior approval of the FRB-Atlanta.
During the third quarter of 2010, the Bank was subject to a joint examination by the FDIC and the TDFI. Based on initial findings presented to the Bank’s management, the Bank expects that either the FDIC or the TDFI or both will require the Bank to agree to certain improvements in its operations, particularly in relation to asset quality matters. We also believe that the Bank will be required to agree to maintain or increase capital to levels above those required to be considered well capitalized. We do not know at this time what minimum levels of capital the regulators will require. If the requirement to maintain higher capital levels than those required to be well capitalized under the prompt corrective action provisions of the FDICIA is contained in a formal enforcement action of the FDIC, the Bank may be subject to additional limitations on its operations including its ability to pay interest on deposits above proscribed rates, which could adversely affect the Bank’s liquidity and/or operating results. The terms of any such supervisory action that goes beyond the steps we have already taken may have a significant negative effect on our business, operating flexibility, results of operations, financial condition and the value of our common stock.

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If we, or our bank subsidiary, are unable to maintain capital levels above those that we, or the bank subsidiary, are required to maintain either as a result of federal regulations or as a result of commitments or agreements that we, or our bank subsidiary, have made to, or with, our regulators, we would likely need to raise additional capital, but that capital may not be available when it is needed.
We, and the Bank, are required by federal and state regulatory authorities to maintain adequate levels of capital to support our, and the Bank’s, operations. In addition, the Bank has informally committed to the TDFI and the FDIC that it will maintain a Tier 1 leverage ratio of at least 10% and a Total risk-based capital ratio of at least 14%. At December 31, 2010, the Bank’s Tier 1 leverage ratio and Total risk-based capital ratio were each below the levels that the Bank had committed to maintain and a Capital Action Plan was submitted to our regulators. At December 31, 2010, the Company did not have sufficient capital available to contribute to the Bank to aid the Bank in meeting its commitment. If the Bank is unable to generate sufficient earnings or reduce the size of its assets to achieve the capital levels that it has informally committed to maintain, the Company will likely have to raise additional capital and contribute that capital to the Bank. We can give you no assurance that we will be able to raise this additional capital on terms acceptable to us and given our current stock price and recent financial performance, it is likely that the price at which we could raise such capital, if at all, would result in significant dilution to our existing shareholders. Further, our ability to raise common equity is limited by the number of authorized, but unissued shares reserved under our charter. If we were to raise capital through a common stock offering, we would likely need to increase our authorized common stock, which would require approval of our shareholders. We cannot assure you that our shareholders would approve such a request.
Liquidity needs could adversely affect our results of operations and financial condition.
We rely on dividends from the Bank as our primary source of funds. The primary source of funds of the Bank, are customer deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans which may be more difficult in economically challenging environments like those currently being experienced. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, customer confidence levels and the Bank’s financial strength, returns available to customers on alternative investments, our financial condition and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances and federal funds lines of credit from correspondent banks. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands. We may be required to continue to reduce our asset size, slow or discontinue capital expenditures or other investments or liquidate assets should such sources not be adequate.
We rely on dividends from our bank subsidiary as our primary source of liquidity and payment of these dividends is limited under Tennessee law.
Under Tennessee law, the amount of dividends that may be declared by the Bank in a year without approval of the Commissioner is limited to net income for that year combined with retained net income for the two preceding years. Because of the losses incurred by the Bank in 2009 and 2010, dividends from the Bank to us, including, if necessary, dividends to support our payment of interest on our subordinated debt and dividends on our preferred stock, including the preferred stock we issued to the U.S. Treasury, would have required prior approval by the Commissioner. During the fourth quarter of 2010, we elected to defer the interest payments on our subordinated debt and dividends on the preferred stock that we issued to the U.S. Treasury as disclosed in our third quarter 2010 Form 10-Q.

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Our ability to maintain required capital levels and adequate sources of funding and liquidity could be impacted by changes in the capital markets and deteriorating economic and market conditions.
We, and the Bank, are required to maintain certain capital levels established by banking regulations or specified by bank regulators or to which we have committed or agreed to maintain. We must also maintain adequate funding sources in the normal course of business to support our operations and fund outstanding liabilities. Our ability to maintain capital levels, sources of funding and liquidity could be impacted by changes in the capital markets and deteriorating economic and market conditions. Failure by the Bank to meet applicable capital guidelines (including those higher levels that the Bank has committed, or may commit in the future, to maintain) or to satisfy certain other regulatory requirements could subject the Bank to a variety of enforcement remedies available to the federal regulatory authorities.
We have increased levels of other real estate, primarily as a result of foreclosures, and we anticipate higher levels of foreclosed real estate expense.
As we have begun to resolve non-performing real estate loans, we have increased the level of foreclosed properties primarily those acquired from builders and from residential land developers. Foreclosed real estate expense consists of three types of charges: maintenance costs, valuation adjustments due to new appraisal values and gains or losses on disposition. As levels of other real estate increase and also as local real estate values decline these charges will likely increase, negatively affecting our results of operations.
Environmental liability associated with commercial lending could result in losses.
In the course of business, the Bank may acquire, through foreclosure, properties securing loans it has originated or purchased which are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, we, or the Bank, might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on our business, results of operations and financial condition.
Changes in interest rates could adversely affect our results of operations and financial condition.
Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. Accordingly, changes in interest rates could decrease our net interest income. Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affects our earnings.
National or state legislation or regulation may increase our expenses and reduce earnings.
Federal bank regulators are increasing regulatory scrutiny, and additional restrictions (including those originating from the Dodd-Frank Act) on financial institutions have been proposed or adopted and signed into law by the President, regulators and Congress. Changes in federal legislation, regulation or policies, such as bankruptcy laws, deposit insurance, consumer protection laws, and capital requirements, among others, can result in significant increases in our expenses and/or charge-offs, which may adversely affect our earnings. Changes in state or federal tax laws or regulations can have a similar impact. Furthermore, financial institution regulatory agencies are expected to continue to be very aggressive in responding to concerns and trends identified in examinations, including the continued issuance of additional formal or informal enforcement or supervisory actions. These actions, whether formal or informal, could result in our, or the Bank, agreeing to limitations or to take actions that limit our operational flexibility, restrict our growth or increase our capital or liquidity levels. Failure to comply with any formal or informal regulatory restrictions, including informal commitments like those we and the Bank have made to our primary regulators, could lead to further regulatory enforcement actions. Negative developments in the financial services industry and the impact of recently enacted or new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. In addition, industry, legislative or regulatory developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating plans.

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Competition from financial institutions and other financial service providers may adversely affect our profitability.
The banking business is highly competitive and we experience competition in each of our markets from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other community banks and super-regional and national financial institutions that operate offices in our primary market areas and elsewhere.
Additionally, we face competition from de novo community banks, including those with senior management who were previously affiliated with other local or regional banks or those controlled by investor groups with strong local business and community ties. These de novo community banks may offer higher deposit rates or lower cost loans in an effort to attract our customers, and may attempt to hire our management and employees.
We compete with these other financial institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to successfully compete with an array of financial institutions in our market areas.
We reported a material weakness in our internal control over financial reporting, and if we are unable to improve our internal controls, our financial results may not be accurately reported.
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2010 identified a material weakness in its internal control over financial reporting, as described in “Item 9A. Controls and Procedures.” This material weakness, or difficulties encountered in implementing new or improved controls or remediation, could prevent us from accurately reporting our financial results, result in material misstatements in our financial statements or cause us to fail to meet our reporting obligations. Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, the price of our common stock and market confidence in our reported financial information.
We have a deferred tax asset and cannot assure you that it will be fully realized.
We had net deferred tax assets (“DTA”) of $45.7 million as of December 31, 2010 and established a valuation allowance against our federal net deferred tax assets of $43.5 million. A valuation allowance is recognized for a net DTA if, based on the weight of available evidence, it is more-likely-than-not that some portion or the entire DTA will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making such judgments, significant weight is given to evidence that can be objectively verified.
As a result of the increased credit losses, the Company entered into a three-year cumulative pre-tax loss position (excluding the goodwill impairment charge recognized in the second quarter of 2009) as of June 30, 2010. A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset which is difficult to overcome. The Company’s estimate of the realization of its net DTA was based on the scheduled reversal of deferred tax liabilities and taxable income available in prior carry back years, and tax planning strategies. Once profitability has been restored for a reasonable time and such profitability is considered sustainable, the valuation allowance would be reversed. Reversal of the valuation allowance requires a great deal of judgment and will be based on the circumstances that exist as of that future date.
We are subject to lawsuits as a result of the losses we incurred in the third quarter of 2010.
In the third quarter of 2010, we recognized significant losses as a result of higher costs related to loan charge-offs, coupled with losses incurred on OREO resulting from sales completed and updated property appraisals received during that quarter. As a result, various plaintiffs filed class action lawsuits, which have subsequently been consolidated into one class action, alleging, among other things, disclosure violations regarding our collateral valuations, the timing of our impairment charges and our accounting for loan charge-offs. The defense of this matter has and will continue to entail considerable cost and will be time-consuming for our management. Unfavorable outcomes in this matter could have an adverse effect on our business, financial condition, results of operations and cash flows.

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We rely heavily on the services of key personnel.
We are dependent on certain key officers who have important customer relationships or are instrumental to our operations. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations. We believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management and sales and marketing personnel, particularly in those areas where we may open new branches. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting or retaining such personnel.
On February 16, 2011, we announced that James E. Adams, our Chief Financial Officer, will be retiring on May 16, 2011 after the Annual Shareholders Meeting on May 12, 2011. We have commenced a search for a replacement for Mr. Adams, but there can be no assurance that we will have found a suitable replacement prior to that date.
The limitations on bonuses, retention awards, severance payments and incentive compensation contained in ARRA may adversely affect our ability to retain our highest performing employees.
For so long as any equity securities that we issued to the U.S. Treasury under the CPP remain outstanding, ARRA and regulations issued thereunder, including the IFR, severely restrict bonuses, retention awards, severance and change in control payments and other incentive compensation payable to our most highly compensated employees including our five senior executive officers. It is possible that we may be unable to create a compensation structure that permits us to retain such officers or other key employees or recruit additional employees, especially if we are competing against institutions that are not subject to the same restrictions. Failure to retain our key employees could materially adversely affect our business and results of operations.
We are subject to extensive regulation that could limit or restrict our activities.
We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various federal and state agencies including the FRB, the FDIC and the TDFI. Our regulatory compliance is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our operations.
The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.
The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission and the Nasdaq Stock Market that are applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. We expect that the Dodd-Frank Act will similarly result in increases in our compliance costs. As a result, we have experienced, and may continue to experience, greater compliance costs.

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Our long-term business strategy includes the continuation of growth plans, and our financial condition and results of operations could be affected if our long-term business strategies are not effectively executed.
Although our primary focus in the near term will be on strengthening our asset quality and improving our capital position, we intend, over the longer term, to continue pursuing a growth strategy for our business through acquisitions and de novo branching. Our prospects must be considered in light of the risks, expenses and difficulties occasionally encountered by financial services companies in growth stages, which may include the following:
Maintaining loan quality;
Maintaining adequate management personnel and information systems to oversee such growth; and,
Maintaining adequate control and compliance functions.
Operating Results:There is no assurance that existing offices or future offices will maintain or achieve deposit levels, loan balances or other operating results necessary to avoid losses or produce profits. Our growth and de novo branching strategy necessarily entails growth in overhead expenses as it routinely adds new offices and staff. Our historical results may not be indicative of future results or results that may be achieved as we continue to increase the number and concentration of our branch offices.
Development of Offices:There are considerable costs involved in opening branches, and new branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, our de novo branches may be expected to negatively impact our earnings during this period of time until the branches reach certain economies of scale.
Expansion into New Markets:Much of our growth over the last five years has been focused in the highly competitive Nashville, Knoxville and Clarksville metropolitan markets. The customer demographics and financial services offerings in these markets are unlike those found in the smaller, more rural East Tennessee markets that we historically served. In the Nashville, Knoxville and Clarksville markets, we face competition from a wide array of financial institutions. Our expansion efforts in these new markets may be impacted if we are unable to meet customer demands or compete effectively with the financial institutions operating in these markets.
Regulatory and Economic Factors:Our growth and expansion plans may be adversely affected by a number of regulatory and economic developments or other events. Failure to obtain required regulatory approvals, changes in laws and regulations or other regulatory developments and changes in prevailing economic conditions or other unanticipated events may prevent or adversely affect our continued growth and expansion.
Failure to successfully address the issues identified above could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our longer term business strategy.
We may face risks with respect to future expansion.
From time to time we may engage in additional de novo branch expansion as well as the acquisition of other financial institutions or parts of those institutions. We may also consider and enter into new lines of business or offer new products or services. Acquisitions and mergers involve a number of risks, including:
the time and costs associated with identifying and evaluating potential acquisitions and merger partners;
inaccuracies in the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution;
the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;
our ability to finance an acquisition and possible dilution to our existing shareholders;
the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses;
entry into new markets where we lack experience;
the introduction of new products and services into our business;
the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and
the risk of loss of key employees and customers.

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We may incur substantial costs to expand. There can be no assurance that integration efforts for any future mergers or acquisitions will be successful. Also, we may issue equity securities, including common stock and securities convertible into shares of our common stock in connection with future acquisitions, which could cause ownership and economic dilution to our shareholders. There is no assurance that, following any future mergers or acquisitions, our integration efforts will be successful or we, after giving effect to the acquisition, will achieve profits comparable to or better than our historical experience.
We are subject to Tennessee anti-takeover statutes and certain charter provisions which could decrease our chances of being acquired even if the acquisition is in our shareholders’ best interests.
As a Tennessee corporation, we are subject to various legislative acts which impose restrictions on and require compliance with procedures designed to protect shareholders against unfair or coercive mergers and acquisitions. These statutes may delay or prevent offers to acquire us and increase the difficulty of consummating any such offers, even if the acquisition of us would be in our shareholders’ best interests. Our amended and restated charter also contains provisions which may make it difficult for another entity to acquire us without the approval of a majority of the disinterested directors on our board of directors.
The success and growth of our business will depend on our ability to adapt to technological changes.
The banking industry and the ability to deliver financial services is becoming more dependent on technological advancement, such as the ability to process loan applications over the Internet, accept electronic signatures, provide process status updates instantly and on-line banking capabilities and other customer expected conveniences that are cost efficient to our business processes. As these technologies are improved in the future, we may, in order to remain competitive, be required to make significant capital expenditures.
Even though our common stock is currently traded on The Nasdaq Global Select Market, the trading volume in our common stock has been thin and the sale of substantial amounts of our common stock in the public market could depress the price of our common stock.
We cannot say with any certainty when a more active and liquid trading market for our common stock will develop or be sustained. Because of this, our shareholders may not be able to sell their shares at the volumes, prices, or times that they desire.
We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. We, therefore, can give no assurance that sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock.
The market price of our common stock may fluctuate in the future, and these fluctuations may be unrelated to our performance. General market price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing common shareholders.
In order to maintain our capital at desired levels or required regulatory levels, or to fund future growth, our board of directors may decide from time to time to issue additional shares of common stock, preferred stock or securities convertible into, exchangeable for or representing rights to acquire shares of our common stock. The sale of these shares may significantly dilute our shareholders’ ownership interest and the per share book value of our common stock. New investors in the future may also have rights, preferences and privileges senior to our current shareholders which may adversely impact our current shareholders.

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Our ability to declare and pay dividends is limited by law, by commitments we have made to our regulators and by the terms of the Series A preferred stock that we have issued to the U.S. Treasury, and we may be unable to pay future dividends.
We derive our income solely from dividends on the shares of common stock of the Bank. The Bank’s ability to declare and pay dividends to us is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to banks that are regulated by the FDIC and the TDFI. In addition, the terms of the Series A preferred stock impose restrictions on our ability to pay dividends on our common stock and we have informally committed to the FRB-Atlanta that we will not pay dividends on our common or preferred stock without the FRB-Atlanta’s prior approval. On November 9, 2010, following consultation with the FRB-Atlanta, we notified the U.S. Treasury that we were suspending the payment of regular quarterly cash dividends on preferred stock that we had issued to the U.S. Treasury in the CPP. We do not know when we will receive permission from the FRB-Atlanta to resume paying dividends on our common or preferred stock. We cannot assure our shareholders that we will declare or pay dividends on shares of our common stock in the future.
Holders of our junior subordinated debentures have rights that are senior to those of our common and Series A preferred shareholders.
We had supported our previous growth through the issuance of trust preferred securities from special purpose trusts and accompanying junior subordinated debentures. This financing vehicle is no longer an attractive source for funding acquisitions as a result of the changing characteristics of trust preferred securities and their limited attributes towards qualifying as primary regulatory capital. At December 31, 2010, we had outstanding trust preferred securities and accompanying junior subordinated debentures totaling $88.7 million. Payments of the principal and interest on the trust preferred securities of these trusts are conditionally guaranteed by us. Further, the accompanying junior subordinated debentures we issued to the trusts are senior to our shares of common stock and the Series A preferred stock that we issued to the U.S. Treasury in the CPP. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock or the Series A preferred stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock or Series A preferred stock. We have the right to defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock or our Series A preferred stock.
As described above, we have informally committed to the FRB-Atlanta that we will not pay interest on the subordinated debentures without the prior approval of the FRB-Atlanta. In the fourth quarter of 2010, following consultation with the FRB-Atlanta, we notified the trustees with respect to each series of our subordinated debentures, of our intent to defer interest payments on the subordinated debentures beginning with the interest payments due in the fourth quarter of 2010.
The Series A preferred stock impacts net income available to our common shareholders and our earnings per share.
As long as shares of our Series A preferred stock are outstanding, no dividends may be paid on our common stock unless all dividends on the Series A preferred stock have been paid in full. Additionally, prior to December 23, 2011, unless we redeem the Series A preferred stock or the U.S. Treasury has transferred the Series A preferred stock to a third party, we are not permitted to pay cash dividends on our common stock in excess of $0.13 per quarter without the U.S. Treasury’s consent. The dividends declared on shares of our Series A preferred stock will reduce the net income available to common shareholders and our earnings per common share. Additionally, warrants to purchase our common stock issued to the Treasury, in conjunction with the issuance of the Series A preferred stock, may be dilutive to our earnings per share. The shares of our Series A preferred stock will also receive preferential treatment in the event of our liquidation, dissolution or winding up.

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Holders of the Series A preferred stock have rights that are senior to those of our common shareholders.
The Series A preferred stock that we have issued to the U.S. Treasury is senior to our shares of common stock, and holders of the Series A preferred stock have certain rights and preferences that are senior to holders of our common stock. The Series A preferred stock will rank senior to our common stock and all other equity securities of ours designated as ranking junior to the Series A preferred stock. So long as any shares of the Series A preferred stock remain outstanding, unless all accrued and unpaid dividends on shares of the Series A preferred stock for all prior dividend periods have been paid or are contemporaneously declared and paid in full, no dividend whatsoever shall be paid or declared on our common stock or other junior stock, other than a dividend payable solely in common stock. Prior to December 23, 2011, unless we redeem the Series A preferred stock or the U.S. Treasury has transferred the Series A preferred stock to a third party we and our subsidiaries also may not, with certain limited exceptions, purchase, redeem or otherwise acquire any shares of our common stock or other junior stock without the U.S. Treasury’s consent. During that three-year period, and thereafter, we and our subsidiaries may not purchase, redeem or otherwise acquire for consideration any shares of our common stock or other junior stock unless we have paid in full all accrued and unpaid dividends on the Series A preferred stock, other than in certain circumstances. Furthermore, the Series A preferred stock is entitled to a liquidation preference over shares of our common stock in the event of our liquidation, dissolution or winding up.
Holders of the Series A preferred stock may, under certain circumstances, have the right to elect two directors to our board of directors.
As described above, on November 9, 2010, we notified the U.S. Treasury that we were suspending the payment of dividends on the Series A preferred stock beginning with the dividend payment due in the fourth quarter of 2010. In the event that we fail to pay dividends on the Series A preferred stock for an aggregate of six quarterly dividend periods or more (whether or not consecutive), the authorized number of directors then constituting our board of directors will be increased by two. Holders of the Series A preferred stock, together with the holders of any outstanding parity stock with like voting rights, referred to as voting parity stock, voting as a single class, will be entitled to elect the two additional members of our board of directors, referred to as the preferred stock directors, at the next annual meeting (or at a special meeting called for the purpose of electing the preferred stock directors prior to the next annual meeting) and at each subsequent annual meeting until all accrued and unpaid dividends for all past dividend periods have been paid in full.
ITEM 1B.

Item 15.

 
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.Exhibits and Financial Statement Schedules  
PROPERTIES.
17
Signatures21
At December 31, 2010,

- 2 -

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

On September 7, 2011, pursuant to an agreement with North American Financial Holdings, Inc. (“NAFH”) (the “Investment Agreement”), the Company maintained a main office in Greeneville, Tennessee in a building it owns, 65 full-service bank branches (of which 54 are owned premisesissued and 11 are leased premises) and a building for mortgage lending operations which it owns. In addition, the Bank’s subsidiaries operate from nine separate locations, all of which are leased.

ITEM 3.
LEGAL PROCEEDINGS.
On November 18, 2010 a shareholder of the Company filed a putative class action lawsuit (styledBill Burgraff v. Green Bankshares, Inc., et al., U.S. District Court, Eastern District of Tennessee, Northeastern Division, Case No. 2:10-cv-00253) against the Company and certain of its current and former officers in the United States District Court for the Eastern District of Tennessee in Greeneville, Tennessee on behalf of all persons that acquiredsold to NAFH 119,900,000 shares of the Company’s common stock between January 19, 2010 and November 9, 2010. On January 18, 2011, a separate shareholderfor aggregate consideration of the Company filed a putative class action lawsuit (styledBrian Molnar v. Green Bankshares, Inc., et al., U.S. District Court, Eastern District of Tennessee, Northeastern Division, Case No. 2:11-cv-00014) against the Company and certain of its current and former officers in the same court on behalf of all persons that acquired shares of the Company’s common stock between January 19, 2010 and October 20, 2010. These lawsuits were filed following, and relate to the drop in value of the Company’s common stock price after, the Company announced its third quarter performance results on October 20, 2010. The Burgraff case also complains of the Company’s decision on November 9, 2010, to suspend payment of certain quarterly cash dividends.

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The plaintiffs allege that defendants made false and/or misleading statements or failed to disclose that the Company was purportedly overvaluing collateral of certain loans; failing to timely take impairment charges of these certain loans; failing to properly account for loan charge-offs; lacking adequate internal and financial controls; and providing false and misleading financial results. The plaintiffs have asserted federal securities laws claims against all defendants for alleged violations of Section 10(b) of the Securities Exchange Act of 1934$217,019,000 (the “Exchange Act”“Investment”) and Rule 10b-5 promulgated thereunder. The plaintiffs have also asserted control person liability claims against the individual defendants named in the complaints pursuant to Section 20(a) of the Exchange Act.
The two cases were consolidated on February 4, 2011. Plaintiffs have 60 days from that date within which to file an amended and consolidated complaint. On February 11, 2011, the Court appointed movant Jeffrey Blomgren as lead plaintiff.
The Company and the individual named defendants collectively intend to vigorously defend themselves against these allegations.
The Company and its subsidiaries are subject to claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these pending claims and legal proceedings will not have a material adverse effect on the Company’s results of operations.
ITEM 4.
REMOVED AND RESERVED

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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
On February 28, 2011, Green Bankshares had 13,188,896 shares of common stock outstanding. The Company’s shares are traded on The Nasdaq Global Select Market, under the symbol “GRNB”. As of February 28, 2011, the Company estimates that it had approximately 5,200 shareholders, including approximately 2,600 shareholders of record and approximately 2,600 beneficial owners holding shares in nominee or “street” name.
The following table shows the high and low sales price and closing priceNAFH’s funds for the Company’s common stock as reported by The Nasdaq Global Select Market for 2010 and 2009. The table also sets forth the dividends per share paid each quarter during 2010 and 2009.
             
          
  High/Low Sales Price  Closing  Dividends Paid 
  During Quarter  Price  Per Share 
2010:
            
First quarter $9.48 / 3.52  $8.16  $— 
Second quarter  15.04 / 7.96   12.77   — 
Third quarter  13.11 / 6.58   6.79   — 
Fourth quarter  7.73 / 2.39   3.20   — 
          $— 
            
2009:
            
First quarter $14.71 / 4.51  $8.80  $0.13 
Second quarter  9.73 / 4.14   4.48   — 
Third quarter  6.83 / 3.25   5.00   — 
Fourth quarter  5.48 / 3.51   3.55   — 
          $0.13 
            
Holders of the Company’s common stock are entitled to receive dividends when, as and if declared by the Company’s board of directors out of funds legally available for dividends. Historically, the Company has paid quarterly cash dividends onInvestment came from its common stock. On June 2, 2009 the Company announced that due to the uncertain nature of the current economic environment that it was suspending the payment of cash dividends to common shareholders in order to prudently preserve capital levels. In the fourth quarter of 2010, the Company informally committed to the FRB-Atlanta that it would not pay dividends on its common or preferred stock without the prior approval of the FRB-Atlanta. The Company’s ability to pay dividends to its shareholders in the future will depend on its earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the Company’s ability to service any equity or debt obligations senior to its common stock, including its outstanding trust preferred securities and accompanying junior subordinated debentures, and other factors deemed relevant by the Company’s board of directors. In addition, in order to pay dividends to shareholders, the Company must receive cash dividends from the Bank. As a result, the Company’s ability to pay future dividends will depend upon the earnings of the Bank, its financial condition and its need for funds.

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Moreover, there are a number of federal and state banking policies and regulations that restrict the Bank’s ability to pay dividends to the Company and the Company’s ability to pay dividends to its shareholders. In particular, because the Bank is a depository institution and its deposits are insured by the FDIC, it may not pay dividends or distribute capital assets if it is in default on any assessment due to the FDIC. In addition, the Tennessee Banking Act prohibits the Bank from declaring dividends in excess of net income for the calendar year in which the dividend is declared plus retained net income for the preceding two years without the approval of the Commissioner of the Tennessee Department of Financial Institutions. Because of the losses incurred by the Bank in 2010 and 2009, the Bank will need to receive the approval of the Commissioner of the TDFI before if pays dividends to the Company. Also, the Bank is subject to regulations which impose certain minimum regulatory capital and minimum state law earnings requirements that affect the amount of cash available for distribution to the Company.
In addition, as long as shares of Series A preferred stock are outstanding, no dividends may be paid on our common stock unless all dividends on the Series A preferred stock have been paid in full and in no event may dividends on our common stock exceed $0.13 per quarter without the consent of the U.S. Treasury for the first three years following our sale of Series A preferred stock to the U.S. Treasury. Lastly, under Federal Reserve policy, the Company is required to maintain adequate regulatory capital, is expected to serve as a source of financial strength to the Bank and to commit resources to support the Bank. These policies and regulations may have the effect of reducing or eliminating the amount of dividends that the Company can declare and pay to its shareholders in the future. For information regarding restrictions on the payment of dividends by the Bank to the Company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Business — Regulation, Supervision and Governmental Policy — Dividends” in this Annual Report. See also Note 12 of Notes of Consolidated Financial Statements.
The Company made no repurchases of its common stock during the quarter ended December 31, 2010.

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ITEM 6.
SELECTED FINANCIAL DATA.
                     
  2010  2009  2008  2007(1)  2006 
  (in thousands, except per share data, ratios and percentages) 
                     
Total interest income $120,864  $138,456  $170,516  $176,626  $117,357 
Total interest expense  37,271   57,931   75,491   81,973   45,400 
                
Net interest income  83,593   80,525   95,025   94,653   71,957 
Provision for loan losses  (71,107)  (50,246)  (52,810)  (14,483)  (5,507)
                
Net interest income after provision for loan losses  12,486   30,279   42,215   80,170   66,450 
Noninterest income  32,544   31,578   33,614   27,602   20,710 
Noninterest expense  (110,815)  (229,587)  (85,837)  (69,252)  (52,708)
                
Income (loss) before income taxes  (65,785)  (167,730)  (10,008)  38,520   34,452 
Income tax (expense) benefit  (14,910)  17,036   4,648   (14,146)  (13,190)
                
Net income (loss)  (80,695)  (150,694)  (5,360)  24,374   21,262 
Preferred stock dividend and accretion of discount on warrants  (5,001)  (4,982)  (92)  —   — 
                
Net income (loss) available to common shareholders $(85,696) $(155,676) $(5,452) $24,374  $21,262 
                
                     
Per Share Data:
                    
Net income (loss) available to common shareholders, basic $(6.54) $(11.91) $(0.42) $2.07  $2.17 
Net income (loss) available to common shareholders, assuming dilution $(6.54) $(11.91) $(0.42) $2.07  $2.14 
Net income (loss) available to common shareholders, assuming dilution adjusted for goodwill impairment charge(7)
 $(6.54) $(1.40) $(0.42) $2.07  $2.14 
Dividends declared $0.00  $0.13  $0.52  $0.68  $0.64 
Common book value(2)(7)
 $5.75  $12.15  $24.09  $24.94  $18.80 
Tangible common book value(3)(7)
 $5.23  $11.44  $12.23  $12.73  $14.87 
                     
Financial Condition Data:
                    
Assets $2,406,040  $2,619,139  $2,944,671  $2,947,741  $1,772,654 
Loans, net of unearned interest $1,745,378  $2,043,807  $2,223,390  $2,356,376  $1,539,629 
Cash and investments $504,559  $378,785  $410,344  $314,615  $91,997 
Federal funds sold $4,856  $3,793  $5,263  $—  $25,983 
Deposits $1,976,854  $2,084,096  $2,184,147  $1,986,793  $1,332,505 
FHLB advances and notes payable $158,653  $171,999  $229,349  $318,690  $177,571 
Subordinated debentures $88,662  $88,662  $88,662  $88,662  $13,403 
Federal funds purchased and repurchase agreements $19,413  $24,449  $35,302  $194,525  $42,165 
Shareholders’ equity $143,897  $226,769  $381,231  $322,477  $184,471 
Common shareholders’ equity(2)(7)
 $75,776  $160,034  $315,885  $322,477  $184,471 
Tangible common shareholders’ equity(3)(7)
 $69,025  $150,699  $160,411  $164,650  $145,931 
Tangible shareholders’ equity(4)(7)
 $137,146  $217,434  $225,757  $164,650  $145,931 
                     
Selected Ratios:
                    
Interest rate spread  3.79%  3.19%  3.48%  3.83%  4.32%
Net interest margin(6)
  3.86%  3.34%  3.70%  4.25%  4.77%
Total tangible equity to tangible assets(4)(5)(7)
  5.72%  8.33%  8.09%  5.90%  8.42%
Tangible common equity to tangible assets(3)(5)(7)
  2.88%  5.77%  5.75%  5.90%  8.42%
Return on average assets  (3.41%)  (5.59%)  (0.18%)  0.98%  1.28%
Return on average equity  (38.56%)  (50.44%)  (1.64%)  8.96%  11.91%
Return on average common equity(2)(7)
  (55.35%)  (64.25%)  (1.65%)  8.96%  11.91%
Return on average common tangible equity(3)(7)
  (58.32%)  (96.77%)  (3.14%)  15.41%  15.25%
Average equity to average assets  8.85%  11.09%  11.24%  10.91%  10.78%
Dividend payout ratio  N/M   N/M   N/M   32.85%  29.49%
Ratio of nonperforming assets to total assets  8.56%  5.07%  2.61%  1.25%  0.29%
Ratio of allowance for loan losses to nonperforming loans  45.83%  66.39%  155.28%  106.34%  635.93%
Ratio of allowance for loan losses to total loans, net of unearned income loans  3.83%  2.45%  2.20%  1.45%  1.45%
1Information for the 2007 fiscal year includes the operations of CVBG, with which the Company merged on May 18, 2007.
2Common shareholders’ equity is shareholders’ equity less preferred stock.

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3Tangible common shareholders’ equity is shareholders’ equity less goodwill, other intangible assets and preferred stock.
4Tangible shareholders’ equity is shareholders’ equity less goodwill and other intangible assets.
5Tangible assets is total assets less goodwill and other intangible assets.
6Net interest margin is the net yield on interest earning assets and is the difference between the Fully Taxable Equivalent yield earned on interest-earning assets less the effective cost of supporting liabilities.
7Please refer to the “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” section following “Selected Financial Data” for more information, including a reconciliation of this non-GAAP financial measure.
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Certain financial information included in the selected financial data is determined by methods other than in accordance with accounting principles generally accepted within the United States (“GAAP”). These non-GAAP financial measures are “net income (loss) per share assuming dilution adjusted for goodwill impairment charge,” “common shareholders’ equity,” “tangible assets,” “tangible shareholders’ equity,” “tangible common book value per share,” “tangible common shareholders’ equity,” “return on average common equity,” and “return on average common tangible equity.” The Company’s management, the entire financial services sector, bank stock analysts, and bank regulators use these non-GAAP measures in their analysis of the Company’s performance.
“Net income (loss) per share available to common shareholders assuming dilution adjusted for goodwill impairment charge” is defined as net income (loss) per share available to common shareholders reduced by goodwill impairment charge, net of tax.
“Common shareholders’ equity” is shareholders’ equity less preferred stock.
“Tangible assets” are total assets less goodwill and other intangible assets.
“Tangible shareholders’ equity” is shareholders’ equity less goodwill and other intangible assets.
“Tangible common book value per share” is defined as total equity reduced by recorded goodwill, other intangible assets and preferred stock divided by total common shares outstanding. This measure discloses changes from period-to-period in book value per share exclusive of changes in intangible assets and preferred stock. Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing total book value while not increasing the tangible assets of a company. Companies utilizing purchase accounting in a business combination, as required by GAAP, must record goodwill related to such transactions.
“Tangible common shareholders’ equity” is shareholders’ equity less goodwill, other intangible assets and preferred stock.
“Return on average common equity” is defined as net income (loss) available to common shareholders’ for the period divided by average equity reduced by average preferred stock.
“Return on average common tangible equity” is defined as net income (loss) available to common shareholders’ for the period divided by average equity reduced by average goodwill, other intangible assets and preferred stock.
These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures which may be presented by other companies.

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The following reconciliation table provides a more detailed analysis of these non-GAAP performance measures:
                     
  At and for the Fiscal Years Ended December 31, 
  2010  2009  2008  2007  2006 
Total shareholders’ equity $143,897  $226,769  $381,231  $322,477  $184,471 
Less: Preferred stock  (68,121)  (66,735)  (65,346)  —   — 
                
Common shareholders’ equity
 $75,776  $160,034  $315,855  $322,477  $184,471 
                
                     
Total shareholders’ equity $143,897  $226,769  $381,231  $322,477  $184,471 
Less:                    
Goodwill  —   —   (143,389)  (143,140)  (31,327)
Core Deposit and other intangibles  (6,751)  (9,335)  (12,085)  (14,687)  (7,213)
Preferred stock  (68,121)  (66,735)  (65,346)  —   — 
                
Tangible common shareholders’ equity
 $69,025  $150,699  $160,411  $164,650  $145,931 
                
                     
Total shareholders’ equity $143,897  $226,769  $381,231  $322,477  $184,471 
Less:                    
Goodwill  —   —   (143,389)  (143,140)  (31,327)
Core Deposit and other intangibles  (6,751)  (9,335)  (12,085)  (14,687)  (7,213)
                
Tangible shareholders’ equity
 $137,146  $217,434  $225,757  $164,650  $145,931 
                
                     
Total assets $2,406,040  $2,619,139  $2,944,671  $2,947,741  $1,772,654 
Less:                    
Goodwill  —   —   (143,389)  (143,140)  (31,327)
Core Deposit and other intangibles  (6,751)  (9,335)  (12,085)  (14,687)  (7,213)
                
Tangible assets
 $2,399,289  $2,609,804  $2,789,197  $2,789,914  $1,734,114 
                
                     
Common book value per share $5.75  $12.15  $24.09  $24.94  $18.80 
Effect of intangible assets $(0.52) $(0.71) $(11.86) $(12.21) $(3.93)
Tangible common book value per share $5.23  $11.44  $12.23  $12.73  $14.87 
                     
Return on average common equity  (55.35%)  (64.25%)  (1.65%)  8.96%  11.91%
Effect of intangible assets  (2.97%)  (32.52%)  (1.49%)  6.45%  3.34%
Return on average common tangible equity  (58.32%)  (96.77%)  (3.14%)  15.41%  15.25%

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The table below presents computations and other financial information excluding the goodwill impairment charge that the Company incurred in 2009. The goodwill impairment charge is included in the financial results presented in accordance with GAAP. The Company believes that the exclusion of the goodwill impairment in expressing net operating income (loss), operating expenses and earnings (loss) per diluted share data provides a more meaningful base for period to period comparisons which will assist investors in analyzing the operating results of the Company. The Company utilizes these non-GAAP financial measures to compare the operating performance with comparable periods in prior years and with internally prepared projections. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, the Company has policies in place to address goodwill impairment from other normal operating expenses to ensure that the Company’s operating results are properly reflected for period to period comparisons.
                     
  For the Fiscal Years Ended December 31, 
  2010  2009  2008  2007  2006 
Total non-interest expense $110,815  $229,587  $85,837  $69,252  $52,708 
Goodwill impairment charge  —   (143,389)  —   —   — 
                
Operating expenses
 $110,815  $86,198  $85,837  $69,252  $52,708 
                
                     
Net income (loss) available to common shareholders $(85,696) $(155,676) $(5,452) $24,374  $21,262 
Goodwill impairment charge, net of tax of $5,975  —   137,414   —   —   — 
                
Net operating income (loss) available to common shareholders
 $(85,696) $(18,262) $(5,452) $24,374  $21,262 
                
                     
Per Diluted Share:
                    
Net income (loss) available to common shareholders $(6.54) $(11.91) $(0.42) $2.07  $2.14 
Goodwill impairment charge, net of tax of $5,975  —   10.51   —   —   — 
                
Net operating income (loss)
 $(6.54) $(1.40) $(0.42) $2.07  $2.14 
                

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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company reported a net loss available to common shareholders of $85,696 for the full year 2010 compared with a net loss available to common shareholders of $155,676 for the full year 2009. The loss for the year 2010 was primarily attributable to an increase in credit costs, including both a higher loan loss provision and elevated costs associated with the disposition and revaluation of OREO related assets along with the effects of the continued weaknesses in the economy through 2010. This weakness was manifested primarily in the Company’s residential real estate construction and development portfolio. As a result, the Company’s provision for loan losses for the full year 2010 remained elevated at $71,107 compared to $50,246 in 2009 and $52,810 in 2008. Additionally, Other Real Estate Owned (“OREO”) charges totaled $29,895 in 2010 compared with $8,156 for 2009 and $7,028 in 2008. As the economy in the Company’s market areas continued to struggle to improve during 2010, net loan charge-offs rose to $54,438 in 2010 compared with net loan charge-offs of $48,896 in 2009 and $38,110 in 2008. On a diluted per share basis, the net operating loss available to common shareholders in 2010 was $6.54 compared with a net operating loss in 2009, excluding the goodwill impairment charge, of $1.40 (please see “ITEM 6 — GAAP Reconciliation and Management Explanations of Non-GAAP Financial Measures” above for more information) and a net operating loss available to common shareholders of $0.42 for 2008. The net loss available to common shareholders on a diluted per share basis for 2010 was $6.54 and including the goodwill impairment charge, on a diluted per share basis the net loss available to common shareholders for 2009 was $11.91 compared with a net loss available to common shareholders of $0.42 for 2008.
Net interest income for 2010 was $83,593 compared with $80,525 in 2009 including the impact of interest reversals of $2,965 in 2010 and $2,606 in 2009. Despite the decline in average earning assets, the improvement in net interest income was due to the Company experiencing the benefit of interest rate floors built into loan agreements beginning in 2009 plus the re-pricing of interest bearing liabilities in a lower market interest rate environment in 2010. As a result, the Company experienced a widening in its net interest margin from 3.34% in 2009 to 3.86% in 2010. Noninterest income improved modestly from $31,578 in 2009 to $32,544 in 2010 principally as a result of higher fee income generated from the sales of annuity and investment products. Operating expenses for 2010 totaled $110,815 in 2010 compared with $229,587 in 2009, or $86,198, excluding the goodwill impairment charge of $143,389 (please see “ITEM 6 — GAAP Reconciliation and Management Explanations of Non-GAAP Financial Measures” above for more information). The increase in operating expenses of $24,617 (excluding the goodwill impairment charge taken in 2009 of $143,389) was principally driven by the increased costs associated with the losses incurred on the revaluations and dispositions of OREO related assets.
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 current and projected economic conditions, historical experience, information from regulators and third party professionals and various assumptions that are believed to be reasonable under the then existing set of facts and circumstances. Actual results could differ 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, including OREO. Based on management’s calculation, an allowance of $66,830, or 3.83%, of total loans, net of unearned interest was an adequate estimate of losses inherent in the loan portfolio as of December 31, 2010. This estimate resulted in a provision for loan losses on the income statement of $71,107 during 2010. 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. For further discussion of the allowance for loan losses and a detailed description of the methodology management uses in determining the adequacy of the allowance, see “ITEM 1. Business — Lending Activities — Allowance for Loan Losses” located above, and “Changes in Results of Operations — Provision for Loan Losses” located below.

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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, OREO 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.
The Company believes its critical accounting policies and estimates also include the valuation of the allowance for the net DTA. A valuation allowance is recognized for a net DTA if, based on the weight of available evidence, it is more-likely-than-not that some portion or the entire DTA will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making such judgments, significant weight is given to evidence that can be objectively verified.working capital. As a result of the increased credit losses, the Company entered into a three-year cumulative pre-tax loss position (excluding the goodwill impairment charge recognized in the first quarter of 2009) as of December 31, 2010. A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset which is difficult to overcome.
The Company’s estimateInvestment, NAFH currently owns approximately 90% of the realization of its net DTA was based on the scheduled reversal of deferred tax liabilities and taxable income available in prior carry back years, and tax planning strategies. Based on management’s calculation, a valuation allowance of $43,455, or 95.2%voting securities of the net DTA, was an adequate estimate as of December 31, 2010. This estimate resulted in a valuation allowance for the net DTA in the income statement of $43,455 for the period ended December 31, 2010. Once profitability has been restored for a reasonable time, generally considered four consecutive quarters, and such profitability is considered sustainable, the valuation allowance would be reversed. ReversalCompany. Upon closing of the valuation allowance requires a great deal of judgmentInvestment, R. Eugene Taylor, NAFH’s Chief Executive Officer, Christopher G. Marshall, NAFH’s Chief Financial Officer, and will be based on the circumstances that existR. Bruce Singletary, NAFH’s Chief Risk Officer, were named as of that future date.
The consolidated financial statements include certain accounting disclosures that require management to make estimates about fair values. Independent third party valuations are used for securities available for sale and securities held to maturity as well as acquisition purchase accounting adjustments. Third party valuations are inputs, but are not solely determinative of value. Estimates of fair value are used in the accounting for loans held for sale, goodwill and other intangible assets. Estimates of fair values are used in disclosures regarding 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.
Changes in Results of Operations
Net loss. The net loss available to common shareholders was $85,696 in 2010 and $155,676 for 2009. The net loss for the year 2009 was primarily attributable to a non-cash charge taken for the impairment of goodwill of $137,414, net of tax of $5,975 and the continued weaknesses in the economy through 2009. Excluding the goodwill impairment charge, net of tax, of $137,414 the Company’s net operating loss was $18,262 for 2009 (please see “ITEM 6 — GAAP ReconciliationCEO, CFO and Management ExplanationsCRO, respectively, and as members of Non-GAAP Financial Measures” above for more information). When comparing the net operating loss of $85,696 in 2010 to the net operating loss of $18,262, excluding the goodwill impairment charge, for 2009 the principal reasons for the increased loss in 2010 were credit related costs that continued to escalate in 2010 driven by both a higher loan loss provision coupled with rising costs associated with the maintenance, disposition and revaluation of OREO along with continued deterioration in economic conditions in our markets. These costs were partially offset by improvements in both net interest income and non-interest income.

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The net loss available to common shareholders’ for 2009 was $155,676 compared to a net loss of $5,452 in 2008. The net loss for the year 2009 was primarily attributable to a non-cash charge taken for the impairment of goodwill of $137,414, net of tax of $5,975 and the continued weaknesses in the economy through 2009. Excluding the goodwill impairment charge, net of tax, of $137,414 the Company’s net operating lossBoard of Directors. In addition, the Company’s Board of Directors was $18,262 for 2009 (please see “ITEM 6 — GAAP Reconciliation and Management Explanations of Non-GAAP Financial Measures” above for more information).The increase in the net operating loss between 2009 and 2008 was primarily attributable toreconstituted with a decline in net interest income of $14,500 from $95,025 in 2008 to $80,525 in 2009 due to narrowing interest rate spreads and deteriorating economic conditions throughout 2009 impacting residential real estate construction lending plus a decline in net securities gains of $2,222 between periods due to higher other-than-temporary impairment charges taken in 2009.
Net Interest Income. The largest source of earnings for the Company is net interest income, which is the difference between interest income on earning assets and interest paid on deposits and other interest-bearing liabilities. The primary factors that affect net interest income are changes in volumes and rates on earning assets and interest-bearing liabilities, which are affected in part by management’s anticipatory responses to changes in interest rates through asset/liability management. Despite deleveraging average earning assetscombination of the Company by $247,978 from 2009three aforementioned executive officers, two existing members (Martha M. Bachman and Samuel E. Lynch) and two additional NAFH-designated members (Peter N. Foss and William A. Hodges).

On January 11, 2012, NAFH changed its name to 2010, net interest income improved from $80,525 in 2009Capital Bank Financial Corp. (“CBF”).

As the Company’s controlling shareholder, CBF has the power to $83,593 in 2010 as interest rate floors were triggered in loan agreements and interest-bearing liabilities were re-priced in a lower interest rate market environment. As a resultcontrol the election of the re-pricing characteristicsCompany’s directors, determine our corporate and management policies and determine the outcome of the balance sheet plus a modest increase of $4,049 in average non-interest bearing demand deposits, the Company’s net interest margin rose from 3.34% in 2009 to 3.86% in 2010. Average loan balances in 2010 were $1,833,865 compared with $2,096,181 in 2009 and this reduction was principally responsible for the decline in average earning assets, partially offset by an increase in short-term investments as liquidity levels increased. Simultaneously, the Company reduced its large certificates of deposit as average balances declined by $325,182 and further eliminated $55,764 in borrowed funds.

During 2009, net interest income was $80,525 as compared to $95,025 in 2008. The Company experienced a decline in average balances of interest-earning assets, with average total interest-earning assets decreasing by $156,713,any corporate transaction or 6%, to $2,433,476 in 2009 from $2,590,189 in 2008. Most of the decline occurred in loans, with average loan balances decreasing by $202,724, or 9%, to $2,096,181 in 2009 from $2,298,905 in 2008. The decrease was primarily due to the continued downturn in economic conditions throughout 2009 that resulted in lower loan demand and heightened levels of loan charge-offs. Average investment securities also decreased $83,966, or 31%, to $189,377 in 2009 from $273,343 in 2008 as the Company focused on de-levering the balance sheet and reducing excess liquidity. Average balances of total interest-bearing liabilities also decreased in 2009 from 2008, with average total interest-bearing deposit balances decreasing by $12,223, or 1%, to $1,950,775 in 2009 from $1,962,998 in 2008, and average securities sold under repurchase agreements and short-term borrowings, and subordinated debentures and FHLB advances and notes payable decreased by $111,132, or 25%, to $337,993 in 2009 from $449,125 in 2008. These decreases are primarily related to the reduction in securities sold under repurchase agreements and short-term borrowings along with the maturities and early payoffs of FHLB advances.
Average Balances, Interest Rates and Yields.Net interest income is affected by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest rate spread”) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. When the total of interest-earning assets approximates or exceeds the total of interest-bearing liabilities, any positive interest rate spread will generate net interest income. An indication of the effectiveness of an institution’s net interest income management is its “net yield on interest-earning assets,” which is net interest income on a fully taxable equivalent basis divided by average interest-earning assets.

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The following table sets forth certain information relatingother matter submitted to the Company’s consolidated average interest-earning assetsshareholders for approval. CBF also has sufficient voting power to amend the Company’s organizational documents. In addition, five of our seven directors, including our Chief Executive Officer, our Chief Financial Officer, and interest-bearing liabilitiesour Chief Risk Officer are affiliated with CBF.

Our Board of Directors is not divided into separate classes and reflects the average fully taxable equivalent yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derivedeach member is elected by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented.

                                     
  2010  2009  2008 
  Average      Average  Average      Average  Average      Average 
  Balance  Interest  Rate  Balance  Interest  Rate  Balance  Interest  Rate 
Interest-earning assets:
                                    
Loans(1)(4)
                                    
Real estate loans $1,517,937  $86,904   5.73% $1,719,026  $99,796   5.81% $1,890,209  $121,168   6.41%
Commercial loans  250,126   14,358   5.74%  295,913   16,284   5.50%  319,131   20,020   6.27%
Consumer and other
loans- net(2)
  65,802   8,963   13.62%  81,242   9,660   11.89%  89,565   10,516   11.74%
Fees on loans  —   3,563       —   3,532       —   3,979     
                               
                                     
Total loans (including fees) $1,833,865  $113,788   6.20% $2,096,181  $129,272   6.17% $2,298,905  $155,683   6.77%
                               
                                     
Investment securities(3)
                                    
Taxable $137,148  $4,937   3.60% $144,881  $7,035   4.86% $227,710  $12,770   5.61%
Tax-exempt(4)
  30,799   1,909   6.20%  31,660   1,938   6.12%  32,743   1,995   6.09%
FHLB and other stock  12,734   530   4.16%  12,836   573   4.46%  12,890   647   5.02%
                               
                                     
Total investment securities $180,681  $7,376   4.08% $189,377  $9,546   5.04% $273,343  $15,412   5.64%
                                     
Other short-term investments  170,952   435   0.25%  147,918   376   0.25%  17,941   175   0.98%
                               
                                     
Total interest-earning assets $2,185,498  $121,599   5.56% $2,433,476  $139,194   5.72% $2,590,189  $171,270   6.61%
                               
                                     
Noninterest-earning assets:
                                    
Cash and due from banks $42,743          $45,870          $51,181         
Premises and equipment  80,556           83,478           83,411         
Other, less allowance for loan losses  202,649           219,831           231,499         
                                  
                                     
Total noninterest-earning assets $325,948          $349,179          $366,091         
                                  
                                     
Total assets $2,511,446          $2,782,655          $2,956,280         
                                  
1Average loan balances exclude nonaccrual loans.
2Installment loans are stated net of unearned income.
3The average balance of and the related yield associated with securities available for sale is based on the cost of such securities.
4Fully Taxable Equivalent (“FTE”) at the rate of 35%. The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

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  2010  2009  2008 
  Average      Average  Average      Average  Average      Average 
  Balance  Interest  Rate  Balance  Interest  Rate  Balance  Interest  Rate 
Interest-bearing liabilities:
                                    
Deposits                                    
Savings, interest checking, and money market accounts $980,878  $9,924   1.01% $784,135  $10,078   1.29% $645,636  $9,588   1.49%
Time deposits  841,458   18,510   2.20%  1,166,640   35,690   3.06%  1,317,362   48,502   3.68%
                               
                                     
Total deposits $1,822,336  $28,434   1.56% $1,950,775  $45,768   2.35% $1,962,998  $58,090   2.96%
                                     
Securities sold under repurchase agreements and short-term borrowings  22,338   22   0.10%  28,049   29   0.10%  106,309   2,111   1.99%
Subordinated debentures  88,662   1,980   2.23%  88,662   2,577   2.91%  88,662   4,555   5.14%
FHLB advances and notes payable  171,229   6,835   3.99%  221,282   9,557   4.32%  254,154   10,735   4.22%
                               
                                     
Total interest-bearing liabilities $2,104,565  $37,271   1.77% $2,288,768  $57,931   2.53% $2,412,123  $75,491   3.13%
                                     
Noninterest bearing liabilities:
                                    
Demand deposits $166,814          $162,765          $187,058         
 
Other liabilities  17,854           22,477           24,832         
                                  
Total non-interest- bearing liabilities $184,668          $185,242          $211,890         
                                     
Shareholders’ equity  222,213           308,645           332,267         
                                  
                                     
Total liabilities and shareholders’ equity $2,511,446          $2,782,655          $2,956,280         
                                  
                                     
Net interest income     $84,328          $81,263          $95,799     
                                  
                                     
Margin analysis:
                                    
Interest rate spread          3.79%          3.19%          3.48%
                                  
                                     
Net yield on interest-earning assets (net interest margin)          3.86%          3.34%          3.70%
                                  

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Rate/Volume Analysis. The following table analyzes net interest income in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates. The table reflects the extent to which changes in the interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been separately identified.
                                 
  2010 vs. 2009  2009 vs. 2008 
          Rate/  Total          Rate/  Total 
  Volume  Rate  Volume  Change  Volume  Rate  Volume  Change 
Interest income:
                                
Loans, net of unearned income $(16,177) $792  $(99) $(15,484) $(13,729) $(13,909) $1,227  $(26,411)
Investment securities:                                
Taxable  (376)  (1,826)  104   (2,098)  (4,645)  (1,713)  623   (5,735)
Tax-exempt  (53)  25   1   (27)  (66)  9   —   (57)
FHLB and other stock, at cost  (5)  (38)  —   (43)  13   (88)  1   (74)
Other short-term investments  59   —   —   59   1,272   (127)  (944)  201 
                         
                                 
Total interest income  (16,552)  (1,047)  6   (17,593)  (17,155)  (15,828)  907   (32,076)
                         
                                 
Interest Expense:
                                
Savings, interest checking, and money market accounts  2,529   (2,145)  (539)  (155)  2,128   (1,347)  (291)  490 
Time deposits  (9,948)  (10,027)  2,795   (17,180)  (5,549)  (8,201)  938   (12,812)
Short-term borrowings  (6)  (1)  —   (7)  (1,671)  (1,379)  968   (2,082)
Subordinated debentures  —   (597)  —   (597)  —   (1,978)  —   (1,978)
Notes payable  (2,162)  (724)  164   (2,722)  (1,389)  242   (31)  (1,178)
                         
                                 
Total interest expense  (9,587)  (13,494)  2,420   (20,661)  (6,481)  (12,663)  1,584   (17,560)
                         
                                 
Net interest income $(6,965) $12,447  $(2,414) $3,068  $(10,674) $(3,165) $(677) $(14,516)
                         
At December 31, 2010, loans outstanding, net of unearned income, were $1,745,378 compared to $2,043,807 at 2009 year end. The decrease is primarily due to weak loan demand resulting from the continued economic pressures experienced within our markets throughout 2010, loan foreclosures resulting in loan balances being transferred to OREO and repossessed assets and increased loan charge-offs. Average outstanding loans, net of unearned interest, for 2010 were $1,833,865, a decrease of 13% from the 2009 average of $2,096,181. Average outstanding loans for 2008 were $2,298,905.
Average investment securities for 2010 were $180,681 compared to $189,377 in 2009 and $273,343 in 2008. The decreases of $8,696 and $83,966, or 5% and 31%, from 2009 to 2010 and 2008 to 2009 primarily reflect the elimination of excess liquidity in the balance sheet through de-levering. In 2010, the average yield on investments was 4.08%, a decrease from the 5.04% yield in 2009 and from the 5.64% yield in 2008. The declining investment yields since 2008 represent the reinvestment of proceeds of maturing securities in a lower interest rate environment. Fully taxable equivalent income provided by the investment portfolio in 2010 was $7,376 as compared to $9,546 in 2009 and $15,412 in 2008.

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Provision for Loan Losses. Management assesses the adequacy of the allowance for loan losses by considering a combination of regulatory and credit risk criteria. The entire loan portfolio is graded and potential loss factors are assigned accordingly. The potential loss factors for impaired loans are assigned based on independent valuations of underlying collateral and management’s judgment. The potential loss factors associated with unimpaired loans are based on a combination of both internal and industry net loss experience, as well as management’s review of trends within the portfolio and related industries.
Generally, commercial real estate, residential real estate and commercial loans are assigned a level of risk at inception. Thereafter, these loans are reviewed on an ongoing basis. The review includes loan payment and collateral status, borrowers’ financial data and borrowers’ internal operating factors such as cash flows, operating income, liquidity, leverage and loan documentation, and any significant change can result in an increase or decrease in the loan’s assigned risk grade. Aggregate dollar volume by risk grade is monitored on an ongoing basis. The establishment of and any changes to risk grades for consumer loans are generally based upon payment performance.
The Bank’s loan loss allowance is increased or decreased based on management’s assessment of the overall risk of its loan portfolio. A portion of the allowance may be allocated to specific loans reflecting unusual circumstances.
Management reviews certain key loan quality indicators on a monthly basis, including current economic conditions, historical charge-offs, delinquency trends and ratios, portfolio mix changes and other information management deems necessary. This review process provides a degree of objective measurement that is used in conjunction with periodic internal evaluations. To the extent that this process yields differences between estimated and actual observed losses, adjustments are made to provisions and/or the level of the allowance for loan losses.
Increases and decreases in the allowance for loan losses due to changes in the measurement of impaired loans are reviewed monthly given the current economic environment. To the extent that impairment is deemed probable, an adjustment is reflected in the provision for loan losses, if necessary, to reflect the losses inherent in the loan portfolio. Loans continue to be classified as impaired unless payments are brought fully current and satisfactory performance is observedshareholders annually for a periodone-year term. Each director and executive officer will hold office until his death, resignation, retirement, removal, disqualification, or until his successor is elected (or appointed) and qualified.

Nominations of at least six months and management further considers the collection of scheduled interest and principal to be probable.

The Company’s provision for loan losses increased for the year 2010 by $20,861 to $71,107 from $50,246 in 2009 while the total loan loss reserve increased from $50,161 at December 31, 2009 to $66,830 at December 31, 2010. The impact of the continuing challenging economic environment, elevated net charge-offs and increased non-performing assets were the primary reasons for the increase in provision expense in 2010. Net charge-offs were $54,438 in 2010 compared with net charge-offs of $48,896 in 2009 and $38,110 in 2008. Management continually evaluates the existing portfolio in light of loan concentrations, current general economic conditions and economic trends. On a monthly basis, the Company undertakes an extensive review of every loan in excess of $1 million that is adversely risk graded and every loan regardless of amount graded substandard.
Appraisals received by the Company during the second half of 2010 on existing OREO and targeted loans reflected further significant deterioration in the value of the underlying properties from the prior year, which along with the deterioration of previously performing relationships, triggered increased charge-offs during this period of time. Management believes that the economic slowdown in the Company’s markets occurring throughout 2008, 2009 and 2010 will continue into at least the first half of 2011. Based on its evaluation of the allowance for loan loss calculation and review of the loan portfolio, management believes the allowance for loan losses is adequate at December 31, 2010. However, the provision for loan losses could further increase throughout 2011 if the general economic trends continue to weaken or the residential real estate markets in Nashville or Knoxville or the financial conditions of borrowers deteriorate beyond management’s current expectations.

Directors

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The ratio of nonperforming assets to total assets reached 8.56% at December 31, 2010 compared with 5.07% at December 31, 2009 and 2.61% at December 31, 2008 reflecting not only the challenging economic environment but also the rise in non-performing asset levels combined with a shrinking Balance Sheet. Total nonperforming assets increased to $205,914 in 2010 from $132,726 in 2009 from $76,806 at year-end 2008. Nonaccrual loans, included in non-performing assets, increased to $143,707 as of December 31, 2010 compared to $75,411 at December 31, 2009 and $30,926 at December 31, 2008. Further reflecting the economic downturn, OREO and repossessed assets increased from $45,371 at the end of 2008 to $57,168 at year-end 2009 and $60,095 at December 31, 2010. Management believes that, based upon recent appraisals, these assets have been appropriately written down based on current economic conditions. The recorded investment of impaired loans, which include substandard loans as well as nonaccrual loans, increased from $47,215 at December 31, 2008 to $115,238 at December 31, 2009 and $185,991 at December 31, 2010. The related allowance on the investment of impaired loans also increased from $2,651 at December 31, 2008 to $5,737 at December 31, 2009 and $24,834 at December 31, 2010. The Company records a risk allocation allowance for loan losses on impaired loans where the risk of loss is deemed to be probable and the amount can be reasonably estimated. Further, the Company specifically records additional allowance amounts for individual loans when the circumstances so warrant. For further discussion of nonperforming assets as it relates to foreclosed real estate and impaired loans, see “ITEM 1. Business — Lending Activities — Past Due, Special Mention, Classified and Nonaccrual Loans” located above.
To further manage its credit risk on loans, the Company maintains a “watch list” of loans that, although currently performing, have characteristics that require closer supervision by management. At December 31, 2010 “watch list” loans totaled $88,130 declining from $212,288 identified at year end 2009. At December 31, 2008 “watch list” loans totaled $182,984. If, and when, conditions are identified that would require additional loan loss reserves to be established due to potential losses inherent in these loans, action would then be taken.
Non-interest Income. The generation of non-interest income, which is income that is not related to interest-earning assets and consists primarily of service charges, commissions and fees, has become more important as increases in levels of interest-bearing deposits and other liabilities continually challenge interest rate spreads.
Total non-interest income for 2010 increased slightly to $32,544 compared to $31,578 in 2009 and declined modestly from $33,614 in 2008. The largest components of non-interest income are service charges on deposit accounts, which totaled $24,179 in 2010, $23,738 in 2009 and $23,176 in 2008. The increase in total non-interest income in 2010 primarily reflects higher service charges on deposit accounts, trust and investment services income and lower other-than-temporary impairment charges on investments. The decrease in total non-interest income from 2008 to 2009 reflected a reduction in net securities gains of $2,222 to $439 in 2009 from $2,661 in 2008. This decrease is a result of lower realized gains on the sale of securities of $1,415 in 2009 compared to $2,661 in 2008 coupled with additional charges taken in 2009 of $976 for other-than-temporary impairment on certain investment portfolio securities. Deposit service charges are fees generated from the higher volume of deposit-related products, specifically fees associated with the continued success of the Bank’s High Performance Checking Program. From the inception of this new product during the first quarter of 2005, the Company experienced “net” new checking account growth of 7,665 in 2005 to net new checking account growth of 14,269 during 2010.
Non-interest Expense. Control of non-interest expense also is an important aspect in generating earnings. Non-interest expense includes, among other expenses, personnel, occupancy, goodwill impairment charges, write downs and net losses from the sales on OREO and expenses such as data processing, printing and supplies, legal and professional fees, postage and FDIC assessments. Total non-interest expense was $110,815 in 2010 compared to $229,587 in 2009 and $85,837 in 2008. The decline in 2010 of $118,772 from 2009 principally reflects the one-time non-cash charge taken for goodwill impairment of $143,389. During 2010, the Company incurred $29,895 in costs associated with losses and revaluations on OREO properties held for sale compared with $8,156 incurred in 2009 and $7,028 in 2008.
Employee compensation and employee benefit costs are the primary element of the Company’s non-interest expenses, excluding the one-time, non-cash write-off of goodwill in 2009. For the years ended December 31, 2010 and 2009, compensation and benefits represented $35,368, or 32% and $34,446, or 40% (excluding the goodwill impairment charge of $143,389 — see “ITEM 6 — GAAP Reconciliation and Management Explanations of Non-GAAP Financial Measures” above for more information), respectively, of total non-interest expense. Including Bank branches and non-Bank office locations, the Company had 65 locations at December 31, 2010 and 2009, and the number of full-time equivalent employees totaled 730 at December 31, 2010 and 716 at December 31, 2009.

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Income Taxes. The Company’s effective income tax rate (benefit) was 22.7% in 2010 compared to (10.2%) in 2009 and (46.4%) in 2008. The effective tax rate for the year ended December 31, 2010 was significantly impacted by the DTA valuation allowance of $43,455. A valuation allowance is recognized for a net DTA if, based on the weight of available evidence, it is more-likely-than-not that some portion or the entire DTA will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making such judgments, significant weight is given to evidence that can be objectively verified. As a result of the increased credit losses, the Company entered into a three-year cumulative pre-tax loss position (excluding the goodwill impairment charge recognized in the second quarter of 2009) as of June 30, 2010. A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset which is difficult to overcome.
The Company’s estimate of the realization of its net DTA was based on the scheduled reversal of deferred tax liabilities and taxable income available in prior carry back years, and tax planning strategies.
Changes in Financial Condition
Total assets at December 31, 2010 were $2,406,040 compared with $2,619,139 at December 31, 2009 a decrease of $213,099. Major changes in the balance sheet categories reflect a decline in loan balances of $298,429 from the prior year comprised of loan charge-offs of $54,438 and transfers to foreclosures of $54,613 accompanied with a decline in lending associated with the current challenging conditions in the economy. These decreases were offset by an increase of $83,720 in cash and cash equivalents and interest earning deposits in banks. Average assets for 2010 also decreased to $2,511,446, a reduction of $271,209, or 10%, from the average asset balance of $2,782,655 for 2009. This decrease in average assets was also due primarily to the items mentioned previously. The Company’s return on average assets was (3.41%) in 2010 and (5.59%) in 2009, principally as a result of significant provisioning expense and OREO expenses in 2010 and the goodwill impairment charge in 2009.
Total assets at December 31, 2009 were $2,619,139, a decrease of $325,532 from total assets of $2,944,671 at December 31, 2008. Major changes in the balance sheet categories reflect a decline in loan balances of $179,583 from the prior year comprised of loan charge-offs of $48,896 and transfers to foreclosures of $75,545 accompanied with a decline in lending associated with recessionary conditions in the economy. An increase of $23,136 in cash and cash equivalents from year-end 2008 was driven principally by the deleveraging of the balance sheet through reducing investment portfolio holdings, partially offset by liquidating borrowed funds. Average assets for 2009 declined to $2,782,655 from $2,956,280 in 2008, a decrease of $173,625. This decrease in average assets was due primarily to the decline in average loan volume of $202,724.
Earning assets consist of loans, investment securities and short-term investments that earn interest. Average earning assets during 2010 were $2,185,498 compared with $2,433,476 in 2009, a decrease of 10%. The decrease in average earnings assets was due primarily to the reduction of loan and investment securities balances throughout 2010 as the Company de-levered the Balance Sheet plus the general decline in demand for loans associated with challenging conditions in the economy.
Nonperforming loans include nonaccrual loans and loans past due 90 days and still on accrual. The Company has a policy of placing loans 90 days delinquent in nonaccrual status and charging them off at 120 days past due. Other loans past due that are well secured and in the process of collection continue to be carried on the Company’s balance sheet. For further information, see Notes 1 and 3 of the Notes to Consolidated Financial Statements. The Company has aggressive collection practices in which senior management is significantly and directly involved.
The Company maintains an investment portfolio to primarily cover pledging requirements for deposits and borrowings and secondarily as a source of liquidity while modestly adding to earnings. Investments at December 31, 2010 had an amortized cost of $200,824 and a market value of $202,469 compared with investments at December 31, 2009 which had an amortized cost of $148,040 and a market value of $148,362. As excess balance sheet liquidity continued to build throughout 2010, the Company increased its investment portfolio accordingly. The Company invests principally in callable federal agency securities. These callable federal agency securities will provide a higher yield than non-callable securities with similar maturities. The primary risk involved in callable securities is that they may be called prior to maturity and the call proceeds received would be re-invested at lower yields. In 2010, the Company purchased $137,297 of callable federal agency securities, which have a high likelihood of being called on the first call date, $31,538 of collateralized mortgage obligations, and $2,985 of mortgage-backed securities. Also in 2010, the Company received $9,095 from the pay down of collateralized mortgage obligations, $2,233 from the pay down of mortgage-backed securities, $105,890 on the maturity or call of various U.S. agency securities, and $1,025 from the maturity or call of municipal securities.

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The Company’s deposits totaled $1,976,854 at December 31, 2010, which represents a decrease of $107,242, or 5%, from $2,084,096 at December 31, 2009. Non-interest bearing demand deposit balances declined to $152,752 at December 31, 2010 from $177,602 at December 31, 2009. The decrease in total deposits was due primarily to the reduction of $83,155 in Certificates of Deposits in excess of $100,000. Average interest-bearing deposits decreased $128,439, or 7%, to $1,822,336 from $1,950,775 at December 31, 2009. In 2009, average interest-bearing deposits decreased $12,223, or 1%, to $1,950,775 from $1,962,998 at December 31, 2008.
Interest paid on deposits in 2010 was $28,434 at an effective rate of 1.56% compared with $45,768 in 2009 at an average cost of 2.35% as market interest rates declined throughout 2010. In 2008, interest of $58,090 was paid at a cost of 2.96% on average deposits of $1,962,998.
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 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. Under Tennessee law, the Bank can only pay dividends to the Company in an amount equal to or less than the total amount of its net income for that year combined with retained net income for the preceding two years. Payment of dividends in excess of this amount requires the consent of the Commissioner of the Tennessee Department of Financial Institutions (“TDFI”), FDIC, and the Federal Reserve Bank of Atlanta (“FRB-Atlanta”). Further, any dividend payments are subject to the continuing ability of the Bank to maintain compliance with minimum federal regulatory capital requirements, or any higher requirements that the Bank may be subject to, (like those that the Bank has informally committed to the TDFI and FDIC that it will maintain), and to retain its characterization under federal regulations as a “well-capitalized” institution. Because of the Bank’s losses in 2009 and 2010, dividends from the Bank to the Company, including funds for payment of dividends on preferred stock and trust preferred, including the preferred stock issued to the U.S. Treasury, and interest on trust preferred securities to the extent that the Company does not have sufficient cash available ata nominating committee or a nominating committee charter. The Board of Directors has decided against establishing a nominating committee because its policy is to have the holding company level, will require prior approvalfull Board of Directors perform the functions that might otherwise be performed by such a committee.

In identifying candidates for the Company’s Board of Directors, the directors consider the composition of the TDFI, FDIC and FRB.

Supervisory guidance fromboard, the FRB indicates that bank holding companies that are experiencing financial difficulties generally should eliminate, reduce or defer dividends on Tier 1 capital instruments including trust preferred securities, preferred stock or common stock, if the holding company needs to conserve capital for safe and sound operation and to serve as a sourceoperating requirements of strength to its subsidiaries. The Company has informally committed to the FRB that it will not (1) declare or pay dividends on the Company’s common or preferred stock, including the preferred shares owned by the U.S. Treasury (2) make any distributions on subordinated debentures or trust preferred securities or (3) incur any additional indebtedness without in each case, the prior written approval of the FRB. On November 9, 2010, following consultation with the FRB-Atlanta, the Company notified the U.S. Treasury that the Company was suspending the payment of regular quarterly cash dividends on the Series A preferred stock issued to the U.S. Treasury. The dividends, which are cumulative, will continue to be accrued for payment in the future and reported as a preferred dividend requirement that is deducted from net income for financial statement purposes. Additionally, following consultation with the FRB-Atlanta, the Company has exercised its rights to defer regularly scheduled interest payments on all of its issues of junior subordinated notes having an outstanding principal amount of $88.6 million, relating to outstanding trust preferred securities (“TRUPs”). In addition, the Company maintains borrowing availability with the FHLB which was fully utilized at December 31, 2010. The Company also maintains federal funds lines of credit totaling $70,000 at four correspondent banks of which $70,000 was available at December 31, 2010, and $10,000 of the federal funds lines of credit is secured by cash on deposit. The Company believes it has sufficient liquidity to satisfy its current operating needs.
In 2010, operating activities of the Company provided $44,842 of cash flows. Cash flows from operating activities were positively affected by various non-cash items, including (i) $71,107 in provision for loan losses, (ii) $7,152 of depreciation and amortization, (iii) $29,895 net loss on OREO and repossessed assets, and (iv) $26,739 in deferred tax expense. This was offset in part by (i) a net loss of $80,695, (ii) a decrease in other assets of $4,139 and (iii) a reduction in accrued interest payable and other liabilities of $5,505. In addition, cash flows from operating activities were increased by the proceeds from the sale of held-for-sale loans of $47,881, offset by cash used to originate held-for-sale loans of $46,994.

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Investing activities, including lending, provided $167,213 of the Company’s cash flows in 2010. Cash flows from investing activities increased from (i) the sale of OREO in the amount of $16,136, (ii) the net decrease in interest-bearing deposits with banks of $11,000 and (iii) the net decrease in loans of $195,847. Investments from the purchase of securities in excess of maturities from securities available for sale over in the amount of $53,414 and premises and equipment of $1,551 in 2010 reduced cash provided from investing activities.
Net cash flows of $128,335 were used by financing activities. The financing cash flow activity in 2010 with respect to notes payable reflected a repayment of funds in the amount of $13,346 and a repayment of funds of $57,350 during 2009. The Company elected to repay FHLB advances by the overall contraction of the balance sheet. In addition, federal funds purchased and repurchase agreements were reduced by $5,036 during 2009. Cash flows used by the net change in total deposits reduced deposits by $107,242, as the continued to reduce the size of the balance sheet. The Company’s cash flow from financing activities was also decreased by the Company’s dividend payments during 2010 of $2,711 on preferred stock.
Capital Resources. The Company’s regulatory 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’s capital continued to exceed the regulatory definition of a “well capitalized” financial institution at December 31, 2010, but fell below the levels that the Bank informally committed to the TDFI and FDIC that it would maintain. Management believes the capital base of the Company allows it to consider 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 currently callable by the Company without penalty. The Company used the proceeds of the offering to support its acquisition of Independent Bankshares Corporation, and the capital raised from the offering qualified 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 by the Company 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.
On May 16, 2007, the Company issued $57,732 of subordinated debentures, as part of a privately placed pool of trust preferred securities. The securities, due in 2037, bear interest at a floating rate of 1.65% above the three-month LIBOR rate, reset quarterly, and are callable by the Company five years from the date of issuance without penalty. The Company used the proceeds of the offering to support its acquisition of CVBG, and the capital raised from the offering qualified as Tier I capital for regulatory purposes.
On May 18, 2007 the Company assumed the obligations of the following two trusts in the CVBG acquisition.
On December 28, 2005, CVBG issued $13,403 of subordinated debentures, as part of a privately placed pool of trust preferred securities. The securities, due in 2036, bear interest at a floating rate of 1.54% above the three-month LIBOR rate, reset quarterly, and are callable five years from the date of issuance without penalty.
On July 31, 2001, CVBG issued $4,124 of subordinated debentures, as part of a privately placed pool of trust preferred securities. The securities, due in 2031, bear interest at a floating rate of 3.58% above the three-month LIBOR rate, reset quarterly, and are currently callable without penalty.

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During 2007 the FRB issued regulations which allow continued inclusion of outstanding and prospective issuances of trust preferred securities as Tier 1 capital subject to stricter quantitative and qualitative limits than allowed under prior regulations. The new limits will phase in over a five-year transition period and would permit the Company’s trust preferred securities, including those obligations assumed in the CVBG acquisition, to continue to be treated as Tier 1 capital. Under the Dodd-Frank Act, the Company’s trust preferred securities should continue to qualify as Tier I capital.
The Company’s ability to repurchase the trust preferred securities or pay dividends on the trust preferred securities, may be limited as a result of the Company’s participation in the CPP, as described above and is limited by the informal commitment the Company made to the FRB-Atlanta in 2010, also as described above.
Shareholders’ equity on December 31, 2010 was $143,897, a decrease of $82,872, or 37%, from $226,769 on December 31, 2009. The decrease in shareholders’ equity was primarily driven by the net loss available to common shareholders of $85,696 in 2010.
On December 23, 2008 the Company entered into a definitive agreement with the U.S. Treasury. Pursuant to the Agreement, we sold to the U.S. Treasury 72,280 shares of Series A preferred stock, having a liquidation amount equal to $1,000 per share, with an attached warrant (the “Warrant”) to purchase 635,504 shares of our common stock, par value $2.00 per share, for $17.06 per share.
The preferred stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per year, for the first five years, and 9% per year thereafter. The Warrant has a 10-year term and an exercise price, subject to anti-dilution adjustments, equal to $17.06 per share of common stock.
The Company is permitted to redeem the Series A preferred stock at any time without penalty subject to the U.S. Treasury’s consultation with the Company’s and the Bank’s appropriate regulatory agency.
Risk-based capital regulations adopted by the FRB and the FDIC require both bank holding companies and banks to achieve and maintain specified ratios of capital to risk-weighted assets. The risk-based capital rules are designed to measure “Tier 1” capital (consisting of stockholders’ equity and trust preferred securities, less goodwill) 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. At December 31, 2010, the Company and the Bank each satisfied their respective minimum regulatory capital requirements,long-term interests of the Company’s shareholders. In conducting this assessment, the directors consider diversity, age, skills, and such other factors as they deem appropriate given the current needs of the board and the Bank was “well-capitalized” within the meaning of federal regulatory requirements. In light of declining asset quality and earnings in 2010, the Bank informally committedCompany to the TDFI and the FDIC that, among other things, it would maintain a Tier 1 leverage ratio (Tier 1 Capitalbalance of knowledge, experience and capability. The directors believe that candidates for director should have certain minimum qualifications, including being able to Average Assets) of at least 10%read and Total risk-based capital ratio (Total Capitalunderstand basic financial statements, having business experience, and having high moral character; however, they retain the right to Risk Weighted Assets) of at least 14%.

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As reflected in the table below, the Bank did not satisfymodify these higher ratio requirements at December 31, 2010. Actual capital levels and minimum levels (in millions) were:
                         
                  Minimum Amounts 
                  to be Well 
          Minimum Required  Capitalized Under 
          for Capital  Prompt Corrective 
  Actual  Adequacy Purposes  Action Provisions 
  Actual  Ratio (%)  Actual  Ratio (%)  Actual  Ratio (%) 
2010                        
Total Capital (to Risk Weighted Assets)                        
Consolidated $239.7   13.2  $145.2   8.0  $181.6   10.0 
Bank  239.6   13.2   145.0   8.0   181.3   10.0 
Tier 1 Capital (to Risk Weighted Assets)                        
Consolidated $216.5   11.9  $72.6   4.0  $108.9   6.0 
Bank  216.4   11.9   72.5   4.0   108.8   6.0 
Tier 1 Capital (to Average Assets)                        
Consolidated $216.5   8.9  $97.6   4.0  $122.0   5.0 
Bank  216.4   8.9   97.5   4.0   121.8   5.0 
                         
2009                        
Total Capital (to Risk Weighted Assets)                        
Consolidated $318.5   14.9  $171.0   8.0  $213.8   10.0 
Bank  317.4   14.9   170.7   8.0   213.4   10.0 
Tier 1 Capital (to Risk Weighted Assets)                        
Consolidated $291.5   13.6  $85.5   4.0  $128.3   6.0 
Bank  290.4   13.6   85.4   4.0   128.0   6.0 
Tier 1 Capital (to Average Assets)                        
Consolidated $291.5   10.7  $108.6   4.0  $135.8   5.0 
Bank  290.4   10.7   108.6   4.0   135.7   5.0 
Off-Balance Sheet Arrangements
At December 31, 2010, the Company had outstanding unused lines of credit and standby letters of credit totaling $227,647 and unfunded loan commitments outstanding of $6,291. 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 neededqualifications from time to fund these outstanding commitments,time. Although the Company has not adopted a formal policy with regard to the ability to liquidate federal funds sold or securities available-for-sale or, onconsideration of diversity in identifying candidates for the Board of Directors, the directors do consider diversity in business, industry and professional experience, differences of viewpoint, education, specific skills and perspectives. The directors believe that the consideration of diversity as a short-term basis, to borrow or purchase federal funds from other financial institutions. At December 31, 2010,factor in selecting members of the Board of Directors will enable the Company had accommodations with upstream correspondent banksto create an assorted Board of Directors that effectively serves the needs of the Company and the interests of its shareholders. With respect to directors who are nominated for unsecured federal funds lines. These accommodations have various covenants relatedre-election, the directors also consider the director’s previous contributions to their termthe Board of Directors.

Set forth below are the names and availability, and in most cases must be repaid within less than a month. The following table presents additionalother information about the Company’s commitments as of December 31, 2010, which by their terms has contractual maturity dates subsequent to December 31, 2010:

                     
  Less than 1          More than 5    
  Year  1-3 Years  3-5 Years  Years  Total 
                     
Commitments to make loans — fixed $3,827  $—  $—  $—  $3,827 
Commitments to make loans — variable  2,464   —   —   —   2,464 
Unused lines of credit  101,145   14,460   13,457   72,911   201,973 
Letters of credit  17,632   8,042   —   —   25,674 
                
Total $125,068  $22,502  $13,457  $72,911  $233,938 
                
Asset/Liability Management
The Company’s Asset/Liability Committee (“ALCO”) actively measures and manages interest rate risk using a process developed by the Bank. The ALCO is also responsible for recommending the Company’s asset/liability management policiespertaining to the Board of Directors and Principal Executive Officers at December 31, 2011:

Name

  

Position with Company

  

Age

  

Year First Elected Director

R. Eugene Taylor (1)

  

President, Chief Executive Officer

and Chairman of the Board

  64  2011

Christopher G. Marshall (1)

  

Executive Vice President, Chief

Financial Officer and Director

  52  2011

R. Bruce Singletary (1)

  

Executive Vice President, Chief

Risk Officer and Director

  61  2011

Martha M. Bachman (2)

  Director  57  2005

Peter N. Foss (2)

  Director  68  2011

William A. Hodges (2)

  Director  63  

2011

Samuel E. Lynch (2)

  Director  52  2008

(1)Member of Executive Committee
(2)Member of Audit Committee

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R. Eugene Taylor. Mr. Taylor has served as Chairman of our Board of Directors and as our Chief Executive Officer since 2011. Mr. Taylor spent 38 years at Bank of America Corp. and its predecessor companies, most recently as the Vice Chairman of the firm and President of Global Corporate & Investment Banking. Mr. Taylor also served on Bank of America’s Risk & Capital and Management Operating Committees. He originally joined Bank of America in 1969 as a credit analyst. He served in branch offices, marketing and management positions across North Carolina and Florida. In 1990, Mr. Taylor was named President of the Florida Bank and, in 1993, President of NationsBank Corp. in Maryland, Virginia and the District of Columbia. In 1998, Mr. Taylor was appointed to lead Consumer and Commercial Banking operations in the legacy Bank of America Western U.S. footprint. He subsequently returned to Charlotte, North Carolina to create a national banking unit and, in 2001, was named President of Bank of America Consumer & Commercial Banking. In 2004, Mr. Taylor assumed responsibility for approval,the organization’s combined commercial banking businesses known as Global Business & Financial Services, before being named Vice Chairman of Bank of America and President of Global Corporate & Investment Banking in 2005. Most recently, Mr. Taylor served as a Senior Advisor at Fortress Investment Group LLC. Mr. Taylor serves as Chairman and Chief Executive Officer of Capital Bank, N.A. and CBF as well as Capital Bank Corporation and TIB Financial Corp., two other bank holding companies in which CBF has a majority interest. Mr. Taylor is a Florida native and received his Bachelor of Science in Finance from Florida State University. Mr. Taylor brings to our Board of Directors valuable and extensive experience from managing and overseeing a broad range of operations during his tenure at Bank of America. His experience in leadership roles and activities in the Southeast qualifies him to serve as the Chairman of our Board of Directors.

Christopher G. Marshall. Mr. Marshall has served as our Chief Financial Officer since 2011. From May to October 2009, Mr. Marshall served as a Senior Advisor to the Chief Executive Officer and Chief Restructuring Officer at GMAC, Inc. From July 2008 through March 2009, he also served as an advisor to The Blackstone Group L.P., providing advice and analysis for potential investments in the banking sector. From 2006 through 2008 Mr. Marshall served as the Chief Financial Officer of Fifth Third Bancorp. Mr. Marshall served as Chief Operations Executive of Bank of America’s Global Consumer and Small Business Bank from 2004 to 2006. Mr. Marshall also served as Bank of America’s Chief Financial Officer of the Consumer Products Group from 2003 to 2004, Chief Operating Officer of Technology and Operations from 2002 to 2003 and Chief Financial Officer of Technology and Operations from 2001 to 2002. Prior to joining Bank of America, Mr. Marshall served as Chief Financial Officer and Chief Operating Officer of Honeywell International Inc. Global Business Services from 1999 to 2001, where he was a key member of the integration team for the merger with AlliedSignal Inc., overseeing the formulationintegration of all finance, information technology and implementationcorporate and administrative functions. From 1995 to 1999, he served as Chief Financial Officer of strategiesAlliedSignal Technical Services Corporation. Prior to improve balance sheet positioningthat, from 1987 to 1995, Mr. Marshall held several managerial positions at TRW, Inc. Mr. Marshall serves as a director and earnings,Chief Financial Officer of Capital Bank, N.A. and reviewingCBF, as well as Capital Bank Corporation and TIB Financial Corp., two other bank holding companies in which CBF has a majority interest. Mr. Marshall earned a Bachelor of Science degree in Business Administration from the University of Florida and obtained a Master of Business Administration degree from Pepperdine University.

R. Bruce Singletary. Mr. Singletary has served as our Chief Risk Officer since 2011. Mr. Singletary spent 32 years at Bank of America and its predecessor companies with the last 19 years in various credit risk roles. Mr. Singletary originally joined C&S National Bank as a credit analyst in Atlanta, Georgia in 1974. He served in various middle market line and credit functions. In 1991, Mr. Singletary was named Senior Credit Policy Executive of C&S Sovran, which was renamed NationsBank Corp. in January 1992 after its acquisition by North Carolina National Bank, for the geographic areas of Maryland, Virginia and the District of Columbia. Mr. Singletary led the credit function of NationsBank Corp. from 1992 to 1998 alongside Mr. Taylor, who served as President of this region from 1993 to 1998. In 1998, Mr. Singletary relocated to Florida to establish a centralized underwriting function to serve middle market commercial clients in the southeastern region of the United States. In 2000, Mr. Singletary assumed credit responsibility for Bank of America’s middle market leveraged finance portfolio for the eastern half of the United States. In 2004, Mr. Singletary served as Senior Risk Manager for commercial banking for Bank of America’s Florida Bank. Mr. Singletary serves as a director and Chief Risk Officer of Capital Bank, N.A. and CBF, as well as Capital Bank Corporation and TIB Financial Corp., two other bank holding companies in which CBF has a majority interest. Mr. Singletary earned a Bachelor of Science degree in Industrial Management from Clemson University and obtained a Master of Business Administration degree from Georgia State University.

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Martha M. Bachman. Ms. Bachman has served as a director of Green Bankshares, Inc. and Capital Bank, N.A. since 2005. Ms. Bachman began her professional career in 1980 as an owner/co-owner of a successful retail, non-public company in Northeast Tennessee which was sold in 2007. She currently provides financial consulting to her family’s other personal enterprises including rental properties, investments and other holdings. Ms. Bachman’s family has been closely affiliated with the Green Bankshares, Inc. for over two generations which provides a strong historical connection between the local community and Capital Bank. Ms. Bachman has extensive experience as a successful business owner and also provides the Board with expertise in matters relating to the retail industry.

Peter N. Foss. Mr. Foss has been a member of our Board of Directors since 2011. Mr. Foss has been President of the General Electric Company’s Olympic Sponsorship and Corporate Accounts since 2003. In addition, Mr. Foss is General Manager for Enterprise Selling, with additional responsibilities for Sales Force Effectiveness and Corporate Sales Programs. He has been with GE for 32 years and, prior to his current position, served for six years as the President of GE Polymerland, a commercial organization representing GE Plastics in the global marketplace. Prior to GE Polymerland, Mr. Foss served in various commercial roles in the company, including introducing LEXAN® film in the 1970s, was the Market Development Manager on the ULTEM® introduction team in 1982. He has also served as the Regional General Manager for four of the GE Plastics regions, including leading the GE Plastics effort in Mexico in the mid-1990s. Mr. Foss serves as a director of CBF and as a director of TIB Financial Corp. and Capital Bank Corporation, two other subsidiary bank holding companies in which CBF has a majority interest. Mr. Foss earned a Bachelor of Science degree in Chemistry from Massachusetts College of Pharmacy, Boston. Mr. Foss’ extensive managerial and sales experience qualifies him to serve on our Board of Directors. His experience assists us in developing plans to expand and energize our sales and marketing activities.

William A. Hodges. Mr. Hodges has been a member of our Board of Directors since 2011. Mr. Hodges has been President and Owner of LKW Properties LLC, a Charlotte-based residential land developer and homebuilder, since 2005. Prior to that, Mr. Hodges worked for over 30 years in various functions at Bank of America and its predecessors. From 2004 to 2005, he served as Chairman of Bank of America’s Capital Commitment Committee. Mr. Hodges served as Managing Director and Head of Debt Capital Markets from 1998 to 2004 and as Managing Director and Head of the Real Estate Finance Group from 1996 to 1998. Prior to Bank of America’s merger with NationsBank Corp., he served as Washington, D.C. Market President and Head of MidAtlantic Commercial Banking for NationsBank Corp. from 1992 to 1996. Mr. Hodges began his career at North Carolina National Bank, where he worked for 20 years in various roles, including Chief Credit Officer of Florida operations and as manager of the Real Estate Banking and Special Assets Groups. Mr. Hodges serves as a director of CBF and as a director of TIB Financial Corp. and Capital Bank Corporation, two other subsidiary bank holding companies in which CBF has a majority interest. Mr. Hodges earned a Bachelor of Arts degree in History from the University of North Carolina at Chapel Hill and a Master of Business Administration degree in finance from Georgia State University. Mr. Hodges’s substantial experience in the banking and real estate sectors qualifies him to serve on our Board of Directors.

Samuel E. Lynch. Dr. Lynch has served as a director of Green Bankshares, Inc. since 2008. Dr. Lynch is founder of BioMimetic and has been its President, CEO and a director since inception in 1999. BioMimetic is a public biotechnology company utilizing purified recombinant human platelet-derived growth factor (rhPDGF-BB) in combination with tissue specific matrices as its primary technology platform for promotion of tissue healing and regeneration. He also served as chairman of the board of BioMimetic from inception until August 2005. Dr. Lynch has spent his career in health care management, product development, and earlier in academic medicine/dentistry, including research and patient care. He received his Doctorate of Medical Sciences and Specialty in Periodontology from the Harvard Medical and Dental Schools, respectively, as well as a Doctorate of Dental Medicine from Southern Illinois University School of Dental Medicine. He has published and lectured extensively worldwide and is a co-inventor of BioMimetic’s technologies. Dr. Lynch’s experience as the president and chief executive officer of a registered public company offers the Board management experience, leadership capabilities, financial knowledge and business acumen.

Shareholder Communications

The Company’s shareholders may communicate directly with the members of the Board of Directors or the individual Chairperson of standing board committees by writing directly to those individuals at Capital Bank Corporation, 333 Fayetteville Street, Suite 700, Raleigh, NC 27601. The Company’s general policy is to forward, and not to intentionally screen, any mail received at the Company’s interest rate sensitivity position.

corporate office that is sent directly to an individual unless the Company believes the communication may pose a security risk.

 

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Code of Ethics

The primary tool that management uses to measure short-term interest rate risk is a net interest income simulation model prepared by an independent national consulting firm and reviewed by another separate and independent national consulting firm. These simulations estimate the impact that various changes in the overall level of interest rates over one- and two-year time horizons would have on net interest income. The results help the Company develop strategies for managing exposure to interest rate risk.
Like any forecasting technique, interest rate simulation modeling is based on a large number of assumptions. In this case, the assumptions relate primarily to loan and deposit growth, asset and liability prepayments, interest rates and balance sheet management strategies. Management believes that both individually and in the aggregate the assumptions are reasonable. Nevertheless, the simulation modeling process produces only a sophisticated estimate, not a precise calculation of exposure.
The Company’s current guidelines for interest rate risk management call for preventive measures ifBoard of Directors has adopted a gradual 200 basis point increase or decrease in short-term rates over the next 12 months would affect net interest income over the same period by more than 18.5%. The Company has been operating well within the guidelines. Ascode of December 31, 2010business conduct and 2009, based on the resultsethics (the “Code of the independent consulting firm’s simulation model, the Company could expect net interest incomeEthics”) that applies to increase by approximately 6.31% and 12.75%, respectively, if short-term interest rates immediately increase by 200 basis points. Conversely, if short-term interest rates immediately decrease by 200 basis points, net interest income could be expected to decrease by approximately 5.40% and 14.20%, respectively.
The scenario described above, in which net interest income increases when interest rates increase and decreases when interest rates decline, is typically referred to as being “asset sensitive” because interest-earning assets exceed interest-bearing liabilities. At December 31, 2010, approximately 43%all of the Company’s gross loans had adjustable rates. While management believes, baseddirectors, officers and employees, including its principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions. The Code of Ethics is available at www.capitalbank-us.com or free of charge upon written request to Nancy A. Snow, Capital Bank Corporation, 333 Fayetteville Street, Suite 700, Raleigh, NC 27601. If we amend or grant any waiver from a provision of our Code of Ethics that applies to our executive officers, we will publicly disclose such amendment or waiver as required by applicable law, including by posting such amendment or waiver on our website at www.capitalbank-us.com or by filing a Current Report on Form 8-K.

Report of the Audit Committee

In accordance with its asset/liability modeling, that the Companywritten Charter (which is liability sensitive as measured over the one year time horizon, it also believes that a rapid, significant and prolonged increase or decrease in rates could have a substantial adverse impactavailable on the Company’s net interest margin.

The Company’s net interest income simulation model incorporates certain assumptions with respect to interest rate floors on certain depositscorporate website located at www.capitalbank-us.com), the Audit Committee supervises the quality and other liabilities. Further, given the relatively low interest rates on some deposit products, a 200 basis point downward shock could very well reduce the costs on some liabilities below zero. In these cases, the Company’s model incorporates constraints which prevent such a shock from simulating liability costs to zero.
The Company also uses an economic value of equity model, prepared and reviewed by the same independent national consulting firm, to complement its short-term interest rate risk analysis. The benefit of this model is that it measures exposure to interest rate changes over time frames longer than the two-year net interest income simulation. The economic valueintegrity of the Company’s equity is determined by calculating the net present value of projected future cash flows for current assetaccounting, auditing and liability positions based on the current yield curve.
Economic value analysis has several limitations. For example, the economic values of asset and liability balance sheet positions do not represent the true fair values of the positions, since economic values reflect an analysis at one particular point in time and do not consider the value of the Company’s franchise. In addition, we must estimate cash flow for assets and liabilities with indeterminate maturities. Moreover, the model’s present value calculations do not take into consideration future changes in the balance sheet that will likely result from ongoing loan and deposit activities conducted by the Company’s core business. Finally, the analysis requires assumptions about events which span several years. Despite its limitations, the economic value of equity model is a relatively sophisticated tool for evaluating the long term effect of possible interest rate movements.

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The Company’s current guidelines for risk management call for preventive measures if an immediate 200 basis point increase or decrease in interest rates would reduce the economic value of equity by more than 23%. The Company operated well within the upper guideline but did not operate within the lower guideline for this ratio as of December 31, 2010. As of December 31, 2010 and 2009, based on the results of an independent national consulting firm’s simulation model and reviewed by a separate independent national consulting firm, the Company could expect its economic value of equity to increase by approximately 16.71% and 10.48%, respectively, if short-term interest rates immediately increased by 200 basis points. Conversely, if short-term interest rates immediately decrease by 200 basis points, economic value of equity could be expected to decrease by approximately 27.85% and 21.94%, at December 31, 2010 and 2009, respectively. The down 200 basis point scenario came in below the Company’s minimum operating guideline of 23% as a result of loan transfers to OREO and non-accrual status thus reducing the impact of the down 200 basis point scenario from the asset side of our balance sheet.
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 December 31, 2010:
                     
  Less than 1          More than 5    
  Year  1-3 Years  3-5 Years  Years  Total 
                     
Certificate of deposits $531,829  $192,743  $55,068  $3,446  $783,086 
Repurchase agreements  19,413   —   —   —   19,413 
FHLB advances and notes payable  15,288   65,566   30,605   47,194   158,653 
Subordinated debentures  —   —   —   88,662   88,662 
Operating lease obligations  1,243   2,294   1,226   734   5,497 
Deferred compensation  1,543   —   256   475   2,274 
Purchase obligations  1,611   —   —   —   1,611 
                
Total $570,927  $260,603  $87,155  $140,511  $1,059,196 
                
Additionally, the Company routinely enters into contracts for services. These contracts may require payment for services to be provided in the future and may also contain penalty clauses for early termination of the contract. Management is not aware of any additional commitments or contingent liabilities which may have a material adverse impact on the liquidity or capital resources of the Company.
Inflation
The effect of inflation on financial institutions differs from its impact on other types of businesses. Since assets and liabilities of banks are primarily monetary in nature, they are more affected by changes in interest rates than by the rate of inflation.
Inflation generates increased credit demand and fluctuation in interest rates. Although credit demand and interest rates are not directly tied to inflation, each can significantly impact net interest income. As in any business or industry, expenses such as salaries, equipment, occupancy, and other operating expenses also are subject to the upward pressures created by inflation.
Since the rate of inflation has been stable during the last several years, the impact of inflation on the earningsreporting practices of the Company has been insignificant.
Effect of New Accounting Standards
FASB — ASU — 2010-06 — In January 2010, the FASB issued additional guidance on fair value disclosures. The new guidance clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a “gross” presentation of activities (purchases, sales, and settlements) within the Level 3 rollforward reconciliation, which will replace the “net” presentation format; and (2) detailed disclosures about the transfers in and out of Level 1 and 2 measurements. This guidance is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentationbehalf of the Level 3 rollforward information, which isBoard. Management has the primary responsibility for preparing the consolidated financial statements and managing the reporting process, including the system of internal controls. As required by the Audit Committee Charter, each Audit Committee member satisfies the independence and financial literacy requirements for annual reporting periods beginning after December 15, 2010,serving on the Audit Committee, and for interim reporting periods within those years. The Company adoptedat least one member has accounting or related financial management expertise, all as stated in the fair value disclosures guidance on January 1, 2010, except forrules of Nasdaq. In fulfilling its oversight responsibilities, the gross presentationAudit Committee discussed and reviewed the audited consolidated financial statements in the Annual Report with management, including a discussion of the Level 3 rollforward information which isquality, not required to be adopted byjust the Company until January 1, 2011.

54

FASB — ASC — 810 and amended by FASB ASU — 2010-10 became effective on January 1, 2010, and was amended to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activitiesacceptability, of the entity that most significantly impactaccounting principles, the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and anyreasonableness of significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC 810 was effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.
FASB — ASU — 2010-20 — “Disclosures about the Credit Quality of Financing Receivablesjudgments, and the Allowance for Credit Losses” The new standard governing the disclosures associated with credit quality and the allowance for loan losses. This standard requires additional disclosures related to the allowance for loan loss with the objectiveclarity of providing financial statement users with greater transparency about an entity’s loan loss reserves and overall credit quality. Additional disclosures include showing on a disaggregated basis the aging of receivables, credit quality indicators, and troubled debt restructures with its effect on the allowance for loan loss. The provisions of this standard were effective for interim and annual periods ending on or after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s financial position and results of operations, but did increase the amount and quality of the credit disclosures in the notes to the consolidated financial statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth on pages 52 through 54 of Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Asset/Liability Management” is incorporated herein by reference.

55

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP,Company.

The Audit Committee discussed and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancereviewed with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
As a result of management’s evaluation of the Company’s internal controls over financial reporting, management identified deficiencies, that when evaluated in combination, lead to the determination that there is a reasonable possibility that the Company’s internal controls could fail to prevent or detect a material misstatement on a timely basis as of December 31, 2010. Accordingly, as a result of this material weakness, management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2010. This material weakness relates to controls surrounding the valuation, documentation and review of impaired loans and other real estate owned at December 31, 2010. As a result of this material weakness, management has adopted a specific action plan to address these deficiencies in internal controls which are discussed in more detail below in Item 9A. Controls and Procedures.
The Company’s independent registered public accounting firm, has issued a report on the effectiveness of the Company’s internal control over financial reporting. That report appears on pages 57 and 58 of this Report.

56

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BOARD OF DIRECTORS AND SHAREHOLDERS
GREEN BANKSHARES, INC.
We have audited Green Bankshares, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management iswho are responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to expressexpressing an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standardsconformity of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. A combination of deficiencies noted as of December 31, 2010 give rise to the following material weakness which is included in management’s assessment. As of December 31, 2010, the Company did not have adequate internal controls surrounding the valuation, documentation and review of impaired loans and other real estate owned. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2010audited consolidated financial statements and this report does not affect our report dated March 15, 2011 on those consolidated financial statements.

57

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Green Bankshares, Inc. and subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Green Bankshares, Inc. and subsidiaries as of December 31, 2010 and 2009 and for each of the years in the three-year period ended December 31, 2010, and our report dated March 15, 2011, expressed an unqualified opinion on those consolidated financial statements. Our report on the consolidated financial statements referred to above refers to the adoption of a new accounting standard in relation to accounting for other-than-temporary impairments of debt securities in 2009.
/s/ Dixon Hughes PLLC
Atlanta, Georgia
March 15, 2011

58

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BOARD OF DIRECTORS AND SHAREHOLDERS
GREEN BANKSHARES, INC.
We have audited the accompanying consolidated balance sheets of Green Bankshares, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Green Bankshares, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
Effective January 1, 2009, the Company changed its method of accounting for other-than-temporary impairments of debt securities in connection with the adoption of revised accounting guidance issued by the Financial Accounting Standards Board.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Green Bankshares, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2011 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Dixon Hughes PLLC
Atlanta, Georgia
March 15, 2011

59

GREEN BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
(Amounts in thousands, except share and per share data)
         
  2010  2009 
ASSETS
        
Cash and due from banks $289,358  $206,701 
Federal funds sold  4,856   3,793 
       
Cash and cash equivalents  294,214   210,494 
Interest earning deposits in other banks  —   11,000 
Securities available for sale  202,002   147,724 
Securities held to maturity (with a market value of $467 and $638)  465   626 
Loans held for sale  1,299   1,533 
Loans, net of unearned interest  1,745,378   2,043,807 
Allowance for loan losses  (66,830)  (50,161)
Other real estate owned and repossessed assets  60,095   57,168 
Premises and equipment, net  78,794   81,818 
FHLB and other stock, at cost  12,734   12,734 
Cash surrender value of life insurance  31,479   30,277 
Core deposit and other intangibles  6,751   9,335 
Deferred tax asset (net of valuation allowance of $43,455 and $0)  2,177   13,600 
Other assets  37,482   49,184 
       
         
Total assets $2,406,040  $2,619,139 
       
         
LIABILITIES AND SHAREHOLDERS’ EQUITY
        
Liabilities        
Non interest-bearing deposits $152,752  $177,602 
Interest-bearing deposits  1,822,703   1,899,910 
Brokered deposits  1,399   6,584 
       
Total deposits  1,976,854   2,084,096 
         
Repurchase agreements  19,413   24,449 
FHLB advances and notes payable  158,653   171,999 
Subordinated debentures  88,662   88,662 
Accrued interest payable and other liabilities  18,561   23,164 
       
Total liabilities $2,262,143  $2,392,370 
       
         
Shareholders’ equity        
Preferred stock: no par, 1,000,000 shares authorized, 72,278 shares outstanding $68,121  $66,735 
Common stock: $2 par, 20,000,000 shares authorized, 13,188,896 and 13,171,474 shares outstanding  26,378   26,343 
Common stock warrants  6,934   6,934 
Additional paid-in capital  188,901   188,310 
Retained earnings (deficit)  (147,436)  (61,742)
Accumulated other comprehensive income (loss)  999   189 
       
Total shareholders’ equity  143,897   226,769 
       
         
Total liabilities and shareholders’ equity $2,406,040  $2,619,139 
       
See accompanying notes.

60

GREEN BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2010, 2009 and 2008
(Amounts in thousands, except share and per share data)
             
  2010  2009  2008 
Interest income            
Interest and fees on loans $113,721  $129,212  $155,627 
Taxable securities  4,938   7,035   12,770 
Nontaxable securities  1,241   1,260   1,297 
FHLB and other stock  530   573   647 
Federal funds sold and other  434   376   175 
          
Total interest income  120,864   138,456   170,516 
             
Interest expense            
Deposits  28,434   45,768   58,090 
Federal funds purchased and repurchase agreements  22   29   2,111 
FHLB advances and notes payable  6,835   9,557   10,735 
Subordinated debentures  1,980   2,577   4,555 
          
Total interest expense  37,271   57,931   75,491 
             
Net interest income  83,593   80,525   95,025 
             
Provision for loan losses  71,107   50,246   52,810 
          
             
Net interest income after provision for loan losses  12,486   30,279   42,215 
             
Non-interest income            
Service charges on deposit accounts  24,179   23,738   23,176 
Other charges and fees  1,791   1,999   2,192 
Trust and investment services income  2,842   1,977   1,878 
Mortgage banking income  703   383   804 
Other income  3,122   3,042   2,903 
Securities gains (losses), net            
Realized gains  —   1,415   2,661 
Other-than-temporary impairment  (553)  (1,678)  — 
Less non-credit portion recognized in other comprehensive income  460   702   — 
          
Total securities gains (loss), net  (93)  439   2,661 
          
Total non-interest income  32,544   31,578   33,614 
             
Non-interest expense            
Employee compensation  31,990   30,611   33,615 
Employee benefits  3,378   3,835   4,788 
Occupancy expense  6,908   6,956   6,900 
Equipment expense  2,846   3,092   3,555 
Computer hardware/software expense  3,523   2,816   2,752 
Professional services  2,777   2,108   2,069 
Advertising  2,388   1,894   3,538 
OREO maintenance expense  2,324   1,222   825 
Collection and repossession expense  3,228   3,131   1,109 
Loss on OREO and repossessed assets  29,895   8,156   7,028 
FDIC insurance  4,155   4,960   1,631 
Core deposit and other intangibles amortization  2,584   2,750   2,602 
Goodwill impairment  —   143,389   — 
Other expenses  14,819   14,667   15,425 
          
Total non-interest expense  110,815   229,587   85,837 
             
Income (loss) before income taxes  (65,785)  (167,730)  (10,008)
             
Provision (benefit) for income taxes  14,910   (17,036)  (4,648)
          
             
Net income (loss)  (80,695)  (150,694)  (5,360)
             
Preferred stock dividends and accretion of discount  5,001   4,982   92 
          
             
Net income (loss) available to common shareholders $(85,696) $(155,676) $(5,452)
          
             
Earnings (loss) per common share:            
Basic $(6.54) $(11.91) $(0.42)
Diluted  (6.54)  (11.91)  (0.42)
See accompanying notes.

61

GREEN BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31, 2010, 2009 and 2008
(Amounts in thousands, except share and per share data)
                                 
              Warrants          Accumulated    
              For  Additional  Retained  Other  Total 
  Preferred  Common Stock  Common  Paid-in  Earnings  Comprehensive  Shareholders’ 
  Stock  Shares  Amount  Stock  Capital  (Deficit)  Income (Loss)  Equity 
Balance, January 1, 2008
  —   12,931,015   25,862   —   185,170   109,938   1,507   322,477 
                                 
Preferred stock transactions:                                
Issuance of 72,278 shares of preferred stock  72,278   —   —   —   —   —   —   72,278 
Discount associated with 635,504 common stock warrants issued with preferred stock  (6,934)  —   —   6,934   —   —   —   — 
Accretion of preferred stock discount  2   —   —   —   —   (2)  —   — 
Preferred stock dividends accrued  —   —   —   —   —   (90)  —   (90)
Common stock transactions:                                
Exercise of shares under stock option plan  —   9,759   19   —   201   —   —   220 
Common stock exchanged for exercised stock options  —   (7,991)  (16)  —   (93)  —   —   (109)
Issuance of restricted common shares  —   60,907   122   —   (122)  —   —   — 
Stock dividend  —   118,997   238   —   1,822   (2,060)  —   — 
Compensation expense:                                
Stock options  —   —   —   —   456       —   456 
Restricted stock  —   —   —   —   303       —   303 
Stock option tax benefit  —   —   —   —   5   —   —   5 
Dividends paid ($.52 per share)  —   —   —   —   —   (6,779)  —   (6,779)
Comprehensive loss:                                
Net loss  —   —   —   —   —   (5,360)  —   (5,360)
Change in unrealized losses, net of reclassification and taxes  —   —   —   —   —   —   (2,170)  (2,170)
                         
Total comprehensive loss                              (7,530)
                                
                                 
Balance, December 31, 2008
  65,346   13,112,687   26,225   6,934   187,742   95,647   (663)  381,231 
                                 
Preferred stock transactions:                                
Accretion of preferred stock discount  1,389   —   —   —   —   (1,389)  —   — 
Preferred stock dividends  —   —   —   —   —   (3,593)  —   (3,593)
Common stock transactions:                                
Issuance of restricted common shares  —   58,787   118   —   (118)  —   —   — 
Compensation expense:                                
Stock options  —   —   —   —   387   —   —   387 
Restricted stock  —   —   —   —   299   —   —   299 
Dividends paid ($.13 per share)  —   —   —   —   —   (1,713)  —   (1,713)
Comprehensive loss:                                
Net loss  —   —   —   —   —   (150,694)  —   (150,694)
Change in unrealized gains, net of reclassification and taxes  —   —   —   —   —   —   852   852 
                         
Total comprehensive loss                              (149,842)
                                
 
Balance, December 31, 2009
 $66,735   13,171,474  $26,343  $6,934  $188,310  $(61,742) $189  $226,769 
                         
                                 
Preferred stock transactions:                                
Accretion of preferred stock discount  1,386   —   —   —   —   (1,386)  —   — 
Preferred stock dividends  —   —   —   —   —   (3,613)  —   (3,613)
Common stock transactions:                                
Issuance of restricted common shares  —   17,422   35   —   (35)  —   —   — 
Compensation expense:                                
Stock options  —   —   —   —   295   —   —   295 
Restricted stock  —   —   —   —   331   —   —   331 
Comprehensive loss:                                
Net loss  —   —   —   —   —   (80,695)  —   (80,695)
Change in unrealized gains, net of reclassification and taxes  —   —   —   —   —   —   810   810 
                         
Total comprehensive loss                              (79,885)
                                
 
Balance, December 31, 2010
 $68,121   13,188,896  $26,378  $6,934  $188,901  $(147,436) $999  $143,897 
                         
See accompanying notes.

62

GREEN BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2010, 2009 and 2008
(Amounts in thousands)
             
  2010  2009  2008 
Cash flows from operating activities
            
Net loss $(80,695) $(150,694) $(5,360)
Adjustments to reconcile net income (loss) to net cash provided by operating activities            
Provision for loan losses  71,107   50,246   52,810 
Impairment of goodwill  —   143,389   — 
Depreciation and amortization  7,152   7,117   7,030 
Security amortization and accretion, net  538   73   (983)
Write down of investments and other securities for impairment  93   1,272   174 
(Gain) loss on sale of securities  —   (1,415)  (2,661)
FHLB stock dividends  —   —   (464)
Net gain on sale of mortgage loans  (653)  (264)  (573)
Originations of mortgage loans held for sale  (46,994)  (43,879)  (49,501)
Proceeds from sales of mortgage loans  47,881   43,050   51,962 
Increase in cash surrender value of life insurance  (1,202)  (1,125)  (1,073)
Gain from settlement of life insurance  —   (305)  — 
Net (gains) losses from sales of fixed assets  (1)  (85)  665 
Stock-based compensation expense  626   686   759 
Net loss on OREO and repossessed assets  29,895   8,156   7,028 
Deferred tax (benefit)  26,739   (1,654)  (4,374)
Net changes:            
Other assets  (4,139)  (21,375)  78 
Accrued interest payable and other liabilities  (5,505)  (3,177)  (10,875)
          
Net cash provided by operating activities  44,842   30,016   44,642 
Cash flows from investing activities
            
Net change in interest-earning deposits with banks  11,000   (11,000)  — 
Purchase of securities available for sale  (171,820)  (92,100)  (180,626)
Proceeds from sale of securities available for sale  —   36,266   123,701 
Proceeds from maturities of securities available for sale  118,246   113,440   88,711 
Proceeds from maturities of securities held to maturity  160   30   645 
Purchase of FHLB stock  —   —   (417)
Net change in loans  195,847   99,111   27,754 
Proceeds from settlement of life insurance  —   691   — 
Proceeds from sale of other real estate  16,136   11,930   20,654 
Improvements to other real estate  (813)  (307)  (1,071)
Proceeds from sale of fixed assets  8   800   58 
Premises and equipment expenditures  (1,551)  (3,542)  (5,814)
          
Net cash provided by investing activities  167,213   155,319   73,595 
Cash flows from financing activities
            
Net change in core deposits  (102,057)  270,162   48,589 
Net change in brokered deposits  (5,185)  (370,213)  148,765 
Net change in federal funds purchased and repurchase agreements  (5,036)  (10,853)  (159,223)
Tax benefit resulting from stock options  —   —   5 
Proceeds from FHLB advances and notes payable  —   —   20,916 
Repayment of FHLB advances and notes payable  (13,346)  (57,350)  (110,258)
Preferred stock dividends paid  (2,711)  (3,232)  — 
Common stock dividends paid  —   (1,713)  (6,779)
Proceeds from issuance of preferred stock and common stock warrants  —   —   72,278 
Proceeds from issuance of common stock  —   —   111 
          
Net cash provided by (used in) financing activities  (128,335)  (173,199)  14,404 
          
Net change in cash and cash equivalents
  83,720   12,136   132,641 
Cash and cash equivalents, beginning of year  210,494   198,358   65,717 
          
Cash and cash equivalents, end of year
 $294,214  $210,494  $198,358 
          
Supplemental disclosures — cash and noncash
            
Interest paid $41,875  $62,198  $77,761 
Income taxes paid net of refunds  (148)  1,675   5,674 
Loans converted to other real estate  54,613   75,545   37,991 
Unrealized gain (loss) on available for sale securities, net of tax  810   852   (2,170)
See accompanying notes.

63

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of Green Bankshares, Inc. (the “Company”) and its wholly owned subsidiary, GreenBank (the “Bank”), and the Bank’s wholly owned subsidiaries, Superior Financial Services, Inc., GCB Acceptance Corp., Inc., Fairway Title Company, Inc, and GB Holdings, LLC. All significant inter-company balances and transactions have been eliminated in consolidation.
Nature of Operations: The Company primarily provides financial services through its offices in Eastern, Middle and Southeastern Tennessee, Western North Carolina and Southwestern Virginia. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate.
Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimatestheir judgments as to the quality, not just the acceptability, of the Company’s accounting principles and assumptions basedsuch other matters as are required to be discussed with the Audit Committee by Statement on available information. These estimatesAuditing Standards No. 61, as amended by Statement on Auditing Standards No. 90 ( Communication with Audit Committees).

In discharging its responsibility for the audit process, the Audit Committee obtained from the independent accountants a letter describing all relationships between the accounting firm and assumptionsthe Company that might bear on the accounting firm’s independence required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accounting firm’s communications with the audit committee concerning independence. The Audit Committee also discussed with the accounting firm any relationships that might impact their objectivity and independence and satisfied itself as to the amounts reportedaccounting firm’s independence, and considered the compatibility of nonaudit services with the accounting firm’s independence.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

CBF now controls more than 50% of the Company’s voting power and, as a result, the Company qualifies as a “controlled company” as defined in Rule 5615(c)(1) of The NASDAQ Stock Market, Inc. Marketplace Rules (the “Marketplace Rules”). Therefore, as of September 7, 2011, the Company is exempt from the requirements of Rule 5605(b)(1) of the Marketplace Rules with respect to the Company Board being comprised of a majority of “Independent Directors,” as defined by Rule 5605(a)(2) of the Marketplace Rules, and Rules 5605(d) and 5605(e) of the Marketplace Rules covering the independence of directors serving on the Compensation Committee and the Governance & Nominating Committee of the Company Board, respectively. As of the closing of the Investment on September 7, 2011, the Company no longer has a compensation committee and the Compensation Committee of CBF’s Board of Directors (the “Compensation Committee”) oversees compensation, policies and benefit plans for the Company’s executive officers.

The Compensation Discussion and Analysis, which we refer to herein as the “CD&A,” describes the Company’s executive compensation philosophy, components and policies, including analysis of the compensation earned by the Company’s named executive officers as detailed in the financial statementsaccompanying tables. Our discussion focuses on compensation and practices relating to our most recently completed fiscal year.

Named Executive Officers

Effective as of the closing of the Investment on September 7, 2011, the Company’s new executive officers are the following: R. Eugene Taylor, President and Chief Executive Officer; Christopher G. Marshall, Executive Vice President and Chief Financial Officer; and R. Bruce Singletary, Executive Vice President and Chief Risk Officer. These individuals have not entered into employment agreements with the Company and are therefore at-will employees. None of the new executive officers receive compensation or are entitled to benefits directly from the Company, and the disclosures provided, and future results could differ.Company does not maintain any plans, programs or arrangements that provide change in control benefits to any of Mr. Taylor, Mr. Marshall or Mr. Singletary. The allowance for loan losses, deferred tax asset valuation, OREO valuation and fair valuescompensation of financial instruments are significant items based on estimates and assumptions.

Cash Flows: Cash and cash equivalents include cash, deposits withthese executives is paid directly by CBF. During 2011, no amount of base salary, bonus or other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for loan, deposit and other borrowing transactions.
Securities: Securities are classified as heldcompensation was paid to maturity and carried at amortized cost when management hasthese executives by the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in accumulated other comprehensive income.
Interest income includes amortization of purchase premium or discount and is recognized based upon the level-yield method. Gains and losses on sales are based on the amortized costCompany. A portion of the security sold. Securities are written downbase salaries and incentive compensation paid to fair value when a declinethese individuals by CBF for their service to the Company was allocated for the purpose of the disclosures herein.

- 6 -

The executive officers of the Company prior to the Investment, including the named executive officers set forth below, participated in fair valueplans and programs of the Company during the portion of 2011 prior to the Investment.

The following executives were our named executive officers for 2011:

Name

Position

R. Eugene Taylor

Chairman and Chief Executive Officer

Christopher G. Marshall

Executive Vice President and Chief Financial Officer

R. Bruce Singletary

Executive Vice President and Chief Credit Officer

Stephen M. Rownd

Former Chairman, President and Chief Executive Officer, and current Market President for Tennessee of Capital Bank

Kenneth R. Vaught

Former Director, President and Chief Banking Officer

Michael J. Fowler

Former Senior Vice President and Chief Financial Officer, and current Senior Vice President of Capital Bank

Compensation Philosophy and Objectives

The Company is other than temporary.

Investments in Equity Securities Carried at Cost: Investment in Federal Home Loan Bank (“FHLB”) stock, which is carried at cost because it can only be redeemed at par, is a required investment based on membership requirements. The Bank also carries certain other equity investments at cost, which approximates fair value.
Loans: Loans are reported atcommitted to maintaining an executive compensation program that will contribute to the principal balance outstanding, netachievement of unearned interest, deferred loan feesthe Company’s business objectives. For 2011, the Company had an executive compensation program that:

fulfilled the Company’s business and costs.
Interest income is reported on the interest method over the loan term. Loan origination fees, net of certain direct origination costs, are deferredoperating needs, conformed with its general human resource strategies and recognized in interest income using the level-yield method. Interest income includes amortization of purchase premiums or discounts on loans purchased. Premiumsenhanced shareholder value; and discounts are amortized on the level yield-method. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Most consumer loans are charged off no later than 120 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal and interest is doubtful. Interest accrued but not collected is reversed against interest income when a loan is placed on nonaccrual status.
(Continued)

 

64

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except shareenabled the Company to attract and per share data)
December 31, 2010, 2009retain the executive talent essential to the Company’s achievement of its short-term and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Interest received is recognized onlong-term business objectives while balancing the cash basis or cost recovery method until qualifying for returnneed to accrual status. Accrual is resumed when all contractually due payments are brought current, six months of payment performance can be measured, and future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values,consider weak economic conditions and the Company’s financial performance in compensation decisions.

The Company’s objective is to pay its executives and other factors. Allocationsemployees at rates that enable the Company to maintain a highly competent and productive staff. The Compensation Committee evaluated both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in key positions, and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies.

Executive Compensation

In light of the allowance may be made for specific loans, buteconomic challenges facing the entire allowance is available for any loanCompany, the Compensation Committee determined that in management’s judgment,the compensation of the named executive officers should be charged-off. Loan lossesprovided primarily in the form of base salary and that incentive compensation should be limited.

Base Salary. Base salary is designed to compensate executives based upon their experience, duties and scope of responsibility, and retain employees with a proven track record of performance. Salaries for executive positions are charged againstestablished using the allowance when management believessame process as for other positions and job levels within the uncollectibility ofCompany, that is, by systematically evaluating the position and assigning a loan is confirmed.

The Bank uses several factors in determining if a loan is impaired. The internal asset classification procedures include a thorough review of significant loans and lending relationships and include the accumulation of related data. This data includes loan payment and collateral status, borrowers’ financial data and borrowers’ operating factors such as cash flows, operating income, liquidity, leverage and loan documentation, and any significant changes. A loan is considered impaired,salary based on current information and events, if it is probablecomparisons with pay scales for similar positions in reasonably comparable institutions. The Compensation Committee determined not to make any adjustments to 2010 base salaries at that time, which have continued to be the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Larger groups of smaller balance, homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated cost to sell when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed.
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over an asset’s useful life on a straight-line basis. Buildings and related components have useful lives ranging from 10 to 40 years, while furniture, fixtures and equipment have useful lives ranging from 3 to 10 years. Leasehold improvements are amortized over the lesser of the life of the asset or lease term.
Mortgage Banking Activities: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market value. The Company controls its interest rate risk with respect to mortgage loans held for sale and loan commitments expected to close by usually entering into agreements to sell loans. The Company records loan commitments related to the origination of mortgage loans held for sale as derivative instruments. The Company’s commitments for fixed rate mortgage loans, generally last 60 to 90 days and are at market rates when initiated. The Company had $4,813 in outstanding loan commitment derivatives at December 31, 2010. The aggregate market value of mortgage loans held for sale takes into account the sales prices of such agreements. The Company also provides currently for any losses on uncovered commitments to lend or sell. The Company sells mortgage loans servicing released.
Bank Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at its cash surrender value or the amount that can be realized.
(Continued)

65

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Goodwill, Core Deposit Intangibles and Other Intangible Assets: Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. During the second quarter of 2009 the Company identified impairment in its goodwill resulting from a prolonged decline in the market value of its stock price relative to book value, and took the appropriate actions. This is explained further in“Note 6 — Goodwill and Other Intangible Assets”.
Core deposit intangible assets arise 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 range from seven to 15 years and are determined by an independent consulting firm. Core deposit intangible assets are assessed at least annually for impairment and any such impairment is recognized in the period identified.
Other intangible assets consist of mortgage servicing rights (“MSR’s”). MSR’s represent the cost of acquiring the rights to service mortgage loans. MSR’s are amortized based on the principal reduction of the underlying loans. The Company is obligated to service the unpaid principal balances of these loans, which were approximately $33 million and $43 million as of December 31, 2010 and 2009, respectively. The Company pays a third party subcontractor to perform servicing and escrow functions with respect to loans sold with retained servicing. MSR’s are assessed at least annually for impairment. The Company does not intend to further pursue this line of business.
Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Repurchase Agreements: All repurchase agreement liabilities represent secured borrowings from existing Bank customers and are not covered by federal deposit insurance.
Benefit Plans: Retirement plan expense is the amount contributed to the plan as determined by Board decision. Deferred compensation expense is recognized during the year the benefit is earned.
Stock Compensation: Compensation cost for stock-based payments is measured based on the fair value of the award, which most commonly includes restricted stock (i.e., unvested common stock), stock options, and stock appreciation rights at the grant date and is recognized in the consolidated financial statements on a straight-line basis over the requisite service period for service-based awards. The fair value of restricted stock is determined based on the price of the Company’s common stock on the date of grant. The fair value of stock options is estimated at the date of grant using a Black-Scholes option pricing model and related assumptions.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amountsbase salaries for the temporary differences between carrying amountsnamed executive officers in 2011.

Messrs. Taylor, Marshall and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance reduces deferred tax assets to the amount expected to be realized and as of December 31, 2010 the Company had recorded a deferred tax valuation allowance of $43,455.

Loan Commitments and Related Financial Instruments: Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments such as standby letters of credit are considered financial guarantees in accordance with applicable accounting standards. The fair value of these financial guarantees is not material.
(Continued)

66

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Earnings (loss) Per Common Share: Basic earnings (loss) per common share are net income (loss) available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings available to common shareholders per common share includes the dilutive impact of additional potential common shares issuable under stock options, unvested restricted stock awards and stock warrants issued to the U.S. TreasurySingletary’s base salary was determined in connection with the Capital Purchase Program.
Comprehensive Income: Comprehensive income consistsfounding and initial private offering of net incomeNorth American Financial Holdings (the predecessor to CBF) in December 2009 and other comprehensive income. Other comprehensive income includes unrealized gainstheir base salaries have not changed since that time.

Annual Bonus. As noted above, Messrs. Taylor, Marshall and losses on securities available for sale which are also recognized as a separate component of equity. Comprehensive income is presented in the consolidated statements of changes in shareholders’ equity.

Recent Accounting Pronouncements: FASB — ASU — 2010-06 — In January 2010, the FASB issued additional guidance on fair value disclosures.Singletary receive compensation, including an annual bonus, from CBF. The new guidance clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a “gross” presentation of activities (purchases, sales, and settlements) within the Level 3 rollforward reconciliation, which will replace the “net” presentation format; and (2) detailed disclosures about the transfers in and out of Level 1 and 2 measurements. This guidance is effective for the first interim or2011 annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years. The Company adopted the fair value disclosures guidance on January 1, 2010, except for the gross presentation of the Level 3 rollforward information which is not required to be adoptedbonus was determined by the Company until January 1, 2011.
FASB — ASC — 810 and amended by FASB ASU — 2010-10 became effective on January 1, 2010, and was amended to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC 810 was effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.
FASB — ASU — 2010-20 — “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The Company adopted the new standard governing the disclosures associated with credit quality and the allowance for loan losses. This standard requires additional disclosures related to the allowance for loan loss with the objective of providing financial statement users with greater transparency about an entity’s loan loss reserves and overall credit quality. Additional disclosures include showing on a disaggregated basis the aging of receivables, credit quality indicators, and troubled debt restructures with its effect on the allowance for loan loss. The provisions of this standard were effective for interim and annual periods ending on or after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s financial position and results of operations, but did increase the amount and quality of the credit disclosures in the notes to the consolidated financial statements.
(Continued)

67

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In the third quarter of 2010, we recognized significant losses as a result of higher costs related to loan charge-offs, coupled with losses incurred on OREO resulting from sales completed and updated property appraisals received during that quarter. As a result, various plaintiffs filed class action lawsuits, which have subsequently been consolidated into one class action, alleging, among other things, disclosure violations regarding our collateral valuations, the timing of our impairment charges and our accounting for loan charge-offs. The defense of this matter has and will continue to entail considerable cost and will be time-consuming for our management. Unfavorable outcomes in this matter could have an adverse effect on our business, financial condition, results of operations and cash flows.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $14,457 and $19,245 was required to meet regulatory reserve and clearing requirements at year-end 2010 and 2009. These balances do not earn interest.
Segments: Internal financial reporting is primarily reported and aggregated in five lines of business: banking, mortgage banking, consumer finance, subprime automobile lending, and title insurance. Banking accounts for 93.6% of revenues for 2010.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Reclassifications: Certain items in prior year financial statements have been reclassified to conform to the 2010 presentation. These reclassifications had no effect on net income or shareholders’ equity as previously reported.
(Continued)

68

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 2 — SECURITIES
Securities are summarized as follows:
                 
      Gross  Gross    
  Amortized  Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
Available for Sale                
2010                
U.S. government agencies $84,106  $115  $(922) $83,299 
States and political subdivisions  31,192   705   (396)  31,501 
Collateralized mortgage obligations  66,043   1,901   (369)  67,575 
Mortgage-backed securities  17,168   815   (19)  17,964 
Trust preferred securities  1,850   —   (187)  1,663 
             
                 
  $200,359  $3,536  $(1,893) $202,002 
             
                 
2009                
U.S. government agencies $52,937  $99  $(988) $52,048 
States and political subdivisions  31,764   877   (449)  32,192 
Collateralized mortgage obligations  44,018   1,281   (622)  44,677 
Mortgage-backed securities  16,607   291   (6)  16,892 
Trust preferred securities  2,088   —   (173)  1,915 
             
                 
  $147,414  $2,548  $(2,238) $147,724 
             
                 
Held to Maturity                
2010                
States and political subdivisions $215  $1  $—  $216 
Other securities  250   1   —   251 
             
                 
  $465  $2  $—  $467 
             
                 
2009                
States and political subdivisions $251  $4  $—  $255 
Other securities  375   8   —   383 
             
                 
  $626  $12  $—  $638 
             
(Continued)

69

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 2 — SECURITIES(Continued)
Contractual maturities of securities at year-end 2010 are shown below. Securities not due at a single maturity date, collateralized mortgage obligations and mortgage-backed securities are shown separately.
             
  Available for Sale  Held to Maturity 
  Fair  Carrying  Fair 
  Value  Amount  Value 
   
Due in one year or less $979  $465  $467 
Due after one year through five years  4,226   —   — 
Due after five years through ten years  61,208   —   — 
Due after ten years  50,050   —   — 
Collateralized mortgage obligations  67,575   —   — 
Mortgage-backed securities  17,964   —   — 
          
             
Total maturities $202,002  $465  $467 
          
Gross gains of $0, $1,415 and $2,661 were recognized in 2010, 2009 and 2008, respectively, from proceeds of $0, $36,266, and $123,701, respectively, on the sale of securities available for sale.
Securities with a fair value of $135,692 and $125,005 at year-end 2010 and 2009 were pledged for public deposits and securities sold under agreements to repurchase and to the Federal Reserve Bank. The balance of pledged securities in excess of the pledging requirements was $7,983 and $9,135 at year-end 2010 and 2009, respectively.
The Company held 200 and 168 securities in its portfolio as of December 31, 2010 and 2009, respectively, and of these securities 53 and 35 had an unrealized loss. Unrealized losses on securities are due to changes in interest rates and not due to credit quality issues.
Securities with unrealized losses at year-end 2010 and 2009 not recognized in income are as follows:
                         
  Less than 12 months  12 months or more  Total 
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
  Value  Loss  Value  Loss  Value  Loss 
2010                        
U. S. government agencies $65,178  $(922) $—  $—  $65,178  $(922)
States and political subdivisions  2,488   (114)  1,659   (282)  4,147   (396)
Collateralized mortgage obligations  14,666   (266)  2,699   (104)  17,365   (370)
Mortgage-backed securities  2,821   (17)  8   (2)  2,829   (19)
Trust preferred securities  —   —   1,663   (186)  1,663   (186)
                   
Total temporarily impaired $85,153  $(1,319) $6,029  $(574) $91,182  $(1,893)
                   
                         
2009                        
U. S. government agencies $40,959  $(988) $—  $—  $40,959  $(988)
States and political subdivisions  2,463   (24)  3,075   (425)  5,538   (449)
Collateralized mortgage obligations  4,997   (32)  3,222   (590)  8,219   (622)
Mortgage-backed securities  2,028   (5)  11   (1)  2,039   (6)
Trust preferred securities  1,783   (122)  132   (51)  1,915   (173)
                   
Total temporarily impaired $52,230  $(1,171) $6,440  $(1,067) $58,670  $(2,238)
                   
(Continued)

70

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 2 — SECURITIES(Continued)
The Company reviews its investment portfolio on a quarterly basis judging each investment for other-than-temporary impairment (“OTTI”). Management does not have the intent to sell any of the temporarily impaired investments and believes it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The OTTI analysis focuses on the duration and amount a security is below book value and assesses a calculation for both a credit loss and a non credit loss for each measured security considering the security’s type, performance, underlying collateral, and any current or potential debt rating changes. The OTTI calculation for credit loss is reflected in the income statement while the non credit loss is reflected in other comprehensive income (loss).
The Company holds a single issue trust preferred security issued by a privately held bank holding company. Based upon available but limited information we have estimated that the likelihood of collecting the security’s principal and interest payments is approximately 50%. In addition, the bank holding company deferred its interest payments beginning in the second quarter of 2009, and we have placed the security on non-accrual. The Federal Reserve Bank of St. Louis entered into an agreement with the bank holding company on October 22, 2009 which was made public on October 30, 2009. Among other provisions of the regulatory agreement, the bank holding company must strengthen its management of operations, strengthen its credit risk management practices, and submit a capital plan. As of December 31, 2010 no other communications between the bank holding company and the Federal Reserve Bank of St. Louis have been made public.
The Company valued the security by projecting estimated cash flows given the assumption of collecting approximately 50% of the security’s principal and interest and then discounting the amount back to the present value using a discount rate of 3.50% plus three month LIBOR. As of December 31, 2010, our best estimate for the three month LIBOR over the next twenty years (the remaining life of the security) is 3.17%. The difference in the present value and the carrying value of the security was the OTTI credit portion. Due to the illiquid trust preferred market for private issuers and the absence of a credible pricing source, we calculated a 15% illiquidity premium for the security to calculate the OTTI non credit portion. The security is currently booked at a fair value of $638 at December 31, 2010 and during the twelve months ended December 31, 2010 the Company recognized a write-down of $75 through non-interest income representing other-than-temporary impairment on the security.
The Company holds a private label class A21 collateralized mortgage obligation that was analyzed for the year ended December 31, 2010 with multiple stress scenarios using conservative assumptions for underlying collateral defaults, loss severity, and prepayments. The average principal at risk given the stress scenarios was calculated at 4.37%, and then analyzed using the present value of the future cash flows using the fixed rate of the security of 5.5% as the discount rate. The difference in the present value and the carrying value of the security was the OTTI credit portion. The security is currently booked at a fair value of $2,699 at December 31, 2010 and during the twelve months ended December 31, 2010 the Company recognized a write-down of $18 through non-interest income representing other-than-temporary impairment on the security.
(Continued)

71

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 2 — SECURITIES(Continued)
The following table presents more detail on selective Company security holdings as of year-end 2010. These details are listed separately due to the inherent level of risk for OTTI on these securities.
                         
                      Present 
      Current              Value 
      Credit  Book  Fair  Unrealized  Discounted 
Description Cusip #  Rating  Value  Value  Loss  Cash Flow 
Collateralized mortgage obligations
                        
Wells Fargo — 2007 - 4 A21  94985RAW2  Caa2  $2,802  $2,699   (103) $2,887 
                         
Trust preferred securities
                        
West Tennessee Bancshares, Inc.  956192AA6  N/A   675   638   (37)  675 
The following table presents a roll-forward of the cumulative amount of credit losses on the Company’s investment securities that have been recognized through earnings as of December 31, 2010 and 2009. Credit losses on the Company’s investment securities recognized in earnings were $93 for the year ended December 31, 2010 and $976 for the year ended December 31, 2009.
         
  December 31,  December 31, 
  2010  2009 
Beginning balance of credit losses at January 1, 2010 and 2009 $976  $— 
Other-than-temporary impairment credit losses  93   976 
       
         
Ending balance of cumulative credit losses recognized in earnings $1,069  $976 
       
NOTE 3 — LOANS
Loans at year-end by segment, net of unearned interest, were as follows:
             
  2010  2009  2008 
   
Commercial real estate $1,080,805  $1,306,398  $1,430,225 
Residential real estate  378,783   392,365   397,922 
Commercial  222,927   274,346   315,099 
Consumer  75,498   83,382   89,733 
Other  1,913   2,117   4,656 
Unearned interest  (14,548)  (14,801)  (14,245)
          
Loans, net of unearned interest $1,745,378  $2,043,807  $2,223,390 
          
             
Allowance for loan losses $(66,830) $(50,161) $(48,811)
          
(Continued)

72

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 3 — LOANS (Continued)
Activity in the allowance for loan losses is as follows:
             
  2010  2009  2008 
             
Beginning balance $50,161  $48,811  $34,111 
Add (deduct):            
Provision for loan losses  71,107   50,246   52,810 
Loans charged off  (57,818)  (54,890)  (41,269)
Recoveries of loans charged off  3,380   5,994   3,159 
          
Balance, end of year $66,830  $50,161  $48,811 
          
Activity in the allowance for loan losses and recorded investment in loans by segment:
                         
  Commercial  Residential             
  Real Estate  Real Estate  Commercial  Consumer  Other  Total 
2010
                        
Allowance for loan losses:
                        
Beginning balance $36,527  $4,350  $5,840  $3,437  $7  $50,161 
Add (deduct):                        
Charge-offs  (48,617)  (3,102)  (3,210)  (2,889)  —   (57,818)
Recoveries  1,301   287   909   882   1   3,380 
Provision  64,992   2,896   1,541   1,678   —   71,107 
                   
Ending balance $54,203  $4,431  $5,080  $3,108  $8  $66,830 
                   
 
Allowance for loan losses:
                        
Allocation for loans individually evaluated for impairment $22,939  $1,027  $722  $146  $—  $24,834 
                   
Allocation for loans collectively evaluated for impairment  31,264   3,404   4,358   2,962   8   41,996 
                   
Ending Balance $54,203  $4,431  $5,080  $3,108  $8  $66,830 
                   
                         
Loans:
                        
Ending balance: individually evaluated for impairment  170,175   8,697   6,149   970   —   185,991 
                   
Ending balance: collectively evaluated for impairment  910,630   363,506   216,778   66,470   1,913   1,559,387 
                   
Impaired loans were as follows:
             
  2010  2009  2008 
             
Loans with no allowance allocated $81,981  $89,292  $29,602 
Loans with allowance allocated $104,010  $25,946  $17,613 
Amount of allowance allocated  24,834   5,737   2,651 
Average impaired loan balance during the year  212,167   125,280   48,347 
Interest income not recognized during impairment  1,105   558   619 
(Continued)

73

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 3 — LOANS (Continued)
Impaired loans of $185,991, $115,238 and $47,215, respectively, at 2010, 2009, 2008 are shown net of amounts previously charged off of $36,574, $27,937, and 11,995, respectively. Interest income actually recognized on these loans during 2010, 2009 and 2008 was $7,470, $2,842, and $2,135, respectively.
Impaired loans by class are presented below for 2010:
                     
    Unpaid    Average  Interest 
  Recorded  Principal  Related  Recorded  Income 
  Investment  Balance  Allowance  Investment  Recognized 
                     
Commercial Real Estate:
                    
Speculative 1-4 Family $72,138  $98,141  $11,830  $85,487  $2,292 
Construction  56,758   69,355   8,366   63,710   2,565 
Owner Occupied  13,590   14,513   851   14,119   644 
Non-owner Occupied  25,824   27,561   1,823   28,786   1,375 
Other  1,865   2,090   69   2,278   66 
Residential Real Estate:
                    
HELOC  2,807   2,894   346   2,603   88 
Mortgage-Prime  4,539   4,722   590   4,661   209 
Mortgage-Subprime  370   370   57   370   — 
Other  981   1,285   34   2,419   47 
Commercial
  6,149   7,510   722   6,729   171 
Consumer:
                    
Prime  217   228   32   252   13 
Subprime  228   228   35   228   — 
Auto-Subprime  525   525   79   525   — 
Other
  —   —   —   —   — 
                
Total $185,991  $229,422  $24,834  $212,167  $7,470 
                
The Bank manages the loan portfolio by assigning one of nine credit risk ratings based on an internal assessment of credit risk. The credit risk categories are prime, desirable, satisfactory I or pass, satisfactory II, acceptable with care, management watch, substandard, and loss.
Prime credit risk rating: Assets of this grade are the highest quality credits of the Bank. They exceed substantially all the Bank’s underwriting criteria, and provide superior protection for the Bank through the paying capacity of the borrower and value of the collateral. The Bank’s credit risk is considered to be negligible. Included in this section are well-established borrowers with significant, diversified sources of income and net worth, or borrowers with ready access to alternative financing and unquestioned ability to meet debt obligations as agreed. A loan secured by cash or other highly liquid collateral, where the Bank holds such collateral, may be assigned this grade.
Desirable credit risk rating: Assets of this grade also exceed substantially all of the Bank’s underwriting criteria; however, they may lack the consistent long-term performance of a Prime rated credit. The credit risk to the Bank is considered minimal on these assets. Paying capacity of the borrower is still very strong with favorable trends and the value of the collateral is considered more than adequate to protect the Bank. Unsecured loans to borrowers with above-average earnings, liquidity and capital may be assigned this grade.
(Continued)

74

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 3 — LOANS (Continued)
Satisfactory I credit risk rating or pass credit rating: Assets of this grade conform to all of the Bank’s underwriting criteria and evidence a below-average level of credit risk. Borrower’s paying capacity is strong, with stable trends. If the borrower is a company, its earnings, liquidity and capitalization compare favorably to typical companies in its industry. The credit is well structured and serviced. Secondary sources of repayment are considered to be good. Payment history is good, and borrower consistently complies with all major covenants.
Satisfactory II credit risk rating: Assets of this grade conform to substantially all of the Bank’s underwriting criteria and evidence an average level of credit risk. However, such assets display more susceptibility to economic, technological or political changes since they lack the above-average financial strength of credits rated Satisfactory Tier I. Borrower’s repayment capacity is considered to be adequate. Credit is appropriately structured and serviced; payment history is satisfactory.
Acceptable with care credit risk rating: Assets of this grade conform to most of the Bank’s underwriting criteria and evidence an acceptable, though higher than average, level of credit risk. However, these loans have certain risk characteristics that could adversely affect the borrower’s ability to repay, given material adverse trends. Therefore, loans in this category require an above-average level of servicing or show more reliance on collateral and guaranties to preclude a loss to the Bank, should material adverse trends develop. If the borrower is a company, it earnings, liquidity and capitalization are slightly below average, when compared to its peers.
Management watch credit risk rating: Assets included in this category are currently protected but are potentially weak. These assets constitute an undue and unwarranted credit risk but do not presently expose the Bank to a sufficient degree of risk to warrant adverse classification. However, Management Watch assets do possess credit deficiencies deserving management’s close attention. If not corrected, such weaknesses or deficiencies may expose the Bank to an increased risk of loss in the future. Management Watch loans represent assets where the Bank’s ability to substantially affect the outcome has diminished to some degree, and thus it must closely monitor the situation to determine if and when a downgrade is warranted.
Substandard credit risk rating: Substandard assets are inadequately protected by the current net worth and financial capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as Substandard.
Loss credit rating: These assets are considered uncollectible and of such little value that their continuance as assets is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off a basically worthless asset even though partial recovery may be affected in the future. Losses should be taken in the period in which they are identified as uncollectible.
(Continued)

75

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 3 — LOANS (Continued)
Credit quality indicators by class are presented below as of December 31, 2010:
                     
  Speculative 1-4          Non-Owner    
  Family  Construction  Owner Occupied  Occupied  Other 
Commercial Real Estate Credit Exposure
                    
Prime $—  $—  $—  $—  $— 
Desirable  —   1,573   968   177   — 
Satisfactory tier I  2,836   978   38,623   56,221   4,246 
Satisfactory tier II  14,010   34,239   102,383   130,850   17,999 
Acceptable with care  69,902   47,093   62,198   159,216   45,597 
Management Watch  27,383   15,259   5,298   26,415   2,965 
Substandard  91,845   61,388   16,289   38,037   6,817 
Loss  —   —   —   —   — 
                
Total  205,976   160,530   225,759   410,916   77,624 
                
     
  Commercial 
Commercial Credit Exposure
    
Prime $1,236 
Desirable  7,951 
Satisfactory tier I  33,859 
Satisfactory tier II  91,505 
Acceptable with care  72,286 
Management Watch  8,511 
Substandard  7,579 
Loss  — 
    
Total  222,927 
    
                 
          Mortgage —    
  HELOC  Mortgage  Subprime  Other 
Consumer Real Estate Credit Exposure
                
Pass $188,086  $131,845  $11,692  $29,833 
Management Watch  1,017   317   —   — 
Substandard  2,807   5,117   50   1,529 
             
Total  191,910   137,279   11,742   31,362 
             
(Continued)

76

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 3 — LOANS (Continued)
             
  Consumer —  Consumer —  Consumer Auto — 
  Prime  Subprime  Subprime 
Consumer Credit Exposure
            
Pass $35,029  $13,093  $18,588 
Management Watch  —   —   — 
Substandard  217   39   474 
          
Total  35,246   13,132   19,062 
          
A substantial portion of commercial real estate loans are secured by real estate in markets in which the Company is located. These loans are often structured with interest reserves to fund interest costs during the construction and development period. Additionally, certain of these loans are structured with interest-only terms. A portion of the consumer mortgage and commercial real estate portfolios originated through the permanent financing of construction, acquisition and development loans. The prolonged economic downturn has negatively impacted many borrowers’ and guarantors’ ability to make payments under the terms of the loans as their liquidity has been depleted. Accordingly, the ultimate collectability of a substantial portion of these loans and the recovery of a substantial portion of the carrying amount of other real estate owned are susceptible to changes in real estate values in these areas. Continued economic distress could negatively impact additional borrowers’ and guarantors’ ability to repay their debt which will make more of the Company’s loans collateral dependent.
Age analysis of past due loans by class are presented below as of December 31,2010:
                             
  30-59  60-89  Greater              Recorded 
  Days  Days  Than  Total      Total  Investment > 90 
  Past Due  Past Due  90 Days  Past Due  Current  Loans  Days and Accruing 
                             
Commercial real estate:
                            
Speculative 1-4 Family $22,267  $1,777  $30,802  $54,846  $151,130  $205,976  $1,758 
Construction  14,541   —   26,915   41,456   119,074   160,530   — 
Owner Occupied  8,114   1,633   4,137   13,884   211,875   225,759   — 
Non-owner Occupied  4,014   5,961   8,814   18,789   392,127   410,916   170 
Other  116   865   1,491   2,472   75,152   77,624   18 
Residential real estate:
                            
HELOC  747   358   644   1,749   190,161   191,910   — 
Mortgage-Prime  1,359   915   1,779   4,053   133,226   137,279   8 
Mortgage-Subprime  100   51   98   249   11,493   11,742   — 
Other  403   176   566   1,145   30,217   31,362   19 
Commercial
  2,422   593   3,922   6,937   215,990   222,927   92 
Consumer:
                            
Prime  315   86   108   509   34,737   35,246   29 
Subprime  155   64   6   225   12,907   13,132   — 
Auto-Subprime  476   166   101   743   18,319   19,062   18 
Other
  73   —   —   73   1,840   1,913   — 
                      
Total  55,102   12,645   79,383   147,130   1,598,248   1,745,378   2,112 
                      
(Continued)

77

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 3 — LOANS (Continued)
Non-accrual loans by class as of December 31, 2010 are presented below:
     
Commercial real estate:
    
Speculative 1-4 Family $63,298 
Construction  41,789 
Owner Occupied  5,511 
Non-owner Occupied  18,772 
Other  1,865 
Residential real estate:
    
HELOC  1,668 
Mortgage-Prime  3,350 
Mortgage-Subprime  254 
Other  957 
Commercial
  5,813 
Consumer:
    
Prime  130 
Subprime  107 
Auto-Subprime  193 
Other
  — 
    
Total  143,707 
    
Nonperforming loans at December 31 were as follows:
         
  2010  2009 
         
Loans past due 90 days still on accrual $2,112  $147 
Nonaccrual loans  143,707   75,411 
       
         
Total $145,819  $75,558 
       
Nonperforming loans and impaired loans are defined differently. Nonperforming loans are loans that are 90 days past due and still accruing interest and nonaccrual loans. Impaired loans are loans that based upon current information and events it is considered probable that the Company will be unable to collect all amounts of contractual interest and principal as scheduled in the loan agreement. Some loans may be included in both categories, whereas other loans may only be included in one category.
(Continued)

78

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 3 — LOANS (Continued)
The Company may elect to formally restructure a loan due to the weakening credit status of a borrower so that the restructuring may facilitate a repayment plan that minimizes the potential losses that the Company may have to otherwise incur. At December 31, 2010, the Company had $49,537 of restructured loans of which $9,597 was classified as non-accrual and the remaining were performing. The Company had taken charge-offs of $843 on the restructured non-accrual loans as of December 31, 2010. At December 31, 2009, the Company had $16,061 of restructured loans of which $4,429 was classified as non-accrual and the remaining were performing. The Company had taken charge-offs of $1,743 on the restructured non-accrual loans as of December 31, 2009.
The aggregate amount of loans to executive officers and directors of the Company and their related interests was approximately $7,848 and $4,936 at year-end 2010 and 2009, respectively. During 2010 and 2009, new loans aggregating approximately $22,124 and $10,545, respectively, and amounts collected of approximately $19,212 and $23,964, respectively, were transacted with such parties.
NOTE 4 — FAIR VALUE DISCLOSURES
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accounting principles generally accepted in the United States of America (“GAAP”), also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.
(Continued)

79

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 4 — FAIR VALUE DISCLOSURES (continued)
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices of like or similar securities, if available and these securities are classified as Level 1 or Level 2. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions and are classified as Level 3.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with GAAP. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2010, substantially all of the impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. In accordance with GAAP, impaired loans where an allowance is establishedCompensation Committee based on the fair valueperformance of collateral require classification in the fair value hierarchy. When the fair valueCBF and of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair valueindividual named executive officer during 2011. The Compensation Committee awarded ach of the collateral is further impaired below the appraised valueMr. Taylor, Mr. Marshall and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
Other Real Estate
Other real estate, consistingMr. Singletary 100% of properties obtained through foreclosure ortheir annual target bonus for 2011, which, in satisfactioneach case, was 100% of loans and requiring subsequent charge-offs, is reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the value are recorded as a component of foreclosed real estate expense. Other real estate is included in Level 3 of the valuation hierarchy.
Loan Servicing Rights
Loan servicing rights are subject to impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used in the completion of impairment testing. If the valuation model reflects a value less than the carrying value, loan servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, the Company classifies loan servicing rights subjected to nonrecurring fair value adjustments as Level 3.
(Continued)
their individual annual base salary.

 

80

- 7 -

Summary Compensation Table

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 4 — FAIR VALUE DISCLOSURES (continued)
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
Below is aThe table that presents information about certain assets and liabilities measured at fair value at year-end 2010 and 2009:
                     
              Total    
  Fair Value  Carrying  Assets/Liabilities 
  Measurement Using  Amount in  Measured 
Description Level 1  Level 2  Level 3  Balance Sheet  at Fair Value 
2010
                    
Securities available for sale                    
U.S. government agencies $—  $83,299  $—  $83,299  $83,299 
States and political subdivisions  —   31,501   —   31,501   31,501 
Collateralized mortgage obligations  —   67,575   —   67,575   67,575 
Mortgage-backed securities  —   17,964   —   17,964   17,964 
Trust preferred securities  —   1,025   638   1,663   1,663 
                     
2009
                    
Securities available for sale                    
U.S. government agencies $—  $52,048  $—  $52,048  $52,048 
States and political subdivisions  —   32,192   —   32,192   32,192 
Collateralized mortgage obligations  —   44,677   —   44,677   44,677 
Mortgage-backed securities  —   16,892   —   16,892   16,892 
Trust preferred securities  —   1,277   638   1,915   1,915 
Level 3 Valuations
Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologiesbelow summarizes the total compensation paid or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
Currently the Company has one trust preferred security that is considered Level 3. For more information on this security please refer to Note 2 — Securities.
(Continued)

81

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 4 — FAIR VALUE DISCLOSURES (continued)
The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value for the periods ended December 31, 2010 and 2009 on a recurring basis using significant unobservable inputs.
         
  2010  2009 
Beginning balance $638  $— 
Total gains or (loss) (realized/unrealized)        
Included in earnings  (75)  (778)
Included in other comprehensive income  75   (112)
Paydowns and maturities  —   — 
Transfers into Level 3  —   1,528 
       
Ending balance $638  $638 
       
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below.
                     
              Total Carrying  Assets/Liabilities 
  Fair Value Measurement Using  Amount in  Measured at Fair 
Description Level 1  Level 2  Level 3  Balance Sheet  Value 
2010
                    
Other real estate $—  $—  $38,086  $38,086  $38,086 
Impaired loans  —   —   129,088   129,088   129,088 
                
Total assets at fair value
 $—  $—  $167,174  $167,174  $167,174 
                
                     
2009
                    
Other real estate $—  $—  $23,508  $23,508  $23,508 
Impaired loans  —   —   57,914   57,914   57,914 
                
Total assets at fair value
 $—  $—  $81,422  $81,422  $81,422 
                
(Continued)

82

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 4 — FAIR VALUE DISCLOSURES(Continued)
The carrying value and estimated fair value of the Company’s financial instruments are as follows at year-end 2010 and 2009.
                 
  2010  2009 
  Carrying  Fair  Carrying  Fair 
  Value  Value  Value  Value 
Financial assets:                
Cash and cash equivalents $294,214  $294,214  $221,494  $221,494 
Securities available for sale  202,002   202,002   147,724   147,724 
Securities held to maturity  465   467   626   638 
Loans held for sale  1,299   1,317   1,533   1,552 
Loans, net  1,678,548   1,664,126   1,993,646   1,950,684 
FHLB and other stock  12,734   12,734   12,734   12,734 
Cash surrender value of life insurance  31,479   31,479   30,277   30,277 
Accrued interest receivable  7,845   7,845   9,130   9,130 
                 
Financial liabilities:                
Deposit accounts $1,976,854  $1,987,105  $2,084,096  $2,095,611 
Federal funds purchased and repurchase agreements  19,413   19,413   24,449   24,449 
FHLB Advances and notes payable  158,653   166,762   171,999   176,602 
Subordinated debentures  88,662   64,817   88,662   70,527 
Accrued interest payable  2,140   2,140   2,561   2,561 
The following methods and assumptions were used to estimate the fair values for financial instruments that are not disclosed previously in this note. The carrying amount is considered to estimate fair value for cash and short-term instruments, demand deposits, liabilities for repurchase agreements, variable rate loans or deposits that reprice frequently and fully, and accrued interest receivable and payable. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, the fair value is estimatedearned by discounted cash flow analysis using current market rates for the estimated life and credit risk. No adjustment has been made for illiquidity in the market on loans as there is no information from which to reasonably base this estimate. Liabilities for FHLB advances and notes payable are estimated using rates of debt with similar terms and remaining maturities. The fair value of off-balance sheet items is based on the current fees or costs that would be charged to enter into or terminate such arrangements, which is not material. The fair value of commitments to sell loans is based on the difference between the interest rates at which the loans have been committed to sell and the quoted secondary market price for similar loans, which is not material.
(Continued)

83

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 5 — PREMISES AND EQUIPMENT
Year-end premises and equipment follows:
         
  2010  2009 
         
Land $18,372  $18,372 
Premises  62,474   61,809 
Leasehold improvements  3,092   3,061 
Furniture, fixtures and equipment  28,057   25,222 
Automobiles  103   112 
Construction in progress  138   2,162 
       
   112,236   110,738 
Accumulated depreciation  (33,442)  (28,920)
       
         
  $78,794  $81,818 
       
Annual rent expense for operating leases was $1,013, $1,223, and $1,216, respectively, for the year-end periods 2010, 2009, and 2008, respectively. Rent commitments under noncancelable operating leases were as follows, before considering renewal options that generally are present:
     
2011 $1,243 
2012  1,251 
2013  1,043 
2014  793 
2015  433 
Thereafter  734 
    
     
Total $5,497 
    
(Continued)

84

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The change in the amount of goodwill is as follows:
         
  2010  2009 
         
Beginning of year $—  $143,389 
Impairment  —   (143,389)
End of year $—  $— 
       
In conjunction with significant acquisitions, the Company recognized goodwill impairment in 2009 of $143,389. The Company’s goodwill since the 2009 goodwill impairment remains at $0.
Core deposit and other intangible
The change in core deposit and other intangibles is as follows:
         
Core deposit intangibles 2010  2009 
Gross carrying amount $19,796  $19,796 
         
Accumulated amortization, beginning of year  (10,803)  (8,304)
Amortization  (2,495)  (2,499)
       
Accumulated amortization, end of year  (13,298)  (10,803)
       
         
End of year $6,498  $8,993 
       
         
Other intangibles 2010  2009 
Gross carrying amount $745  $745 
         
Accumulated amortization, beginning of year  (403)  (152)
Amortization  (89)  (251)
       
Accumulated amortization, end of year  (492)  (403)
       
         
End of year $253  $342 
       
Estimated amortization expense for each of the next five years is as follows:
     
2011 $2,531 
2012  2,401 
2013  1,701 
2014  118 
2015  — 
    
Total $6,751 
    
(Continued)

85

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 7 — DEPOSITS
Deposits at year-end were as follows:
         
  2010  2009 
         
Noninterest-bearing demand deposits $152,752  $177,602 
Interest-bearing demand deposits  939,091   837,268 
Savings deposits  101,925   86,166 
Brokered deposits  1,399   6,584 
Time deposits  781,687   976,476 
       
Total deposits $1,976,854  $2,084,096 
       
Brokered and time deposits of $100 or more were $309,701 and $395,595 at year-end 2010 and 2009, respectively.
Scheduled maturities of brokered and time deposits for the next five years and thereafter were as follows:
     
2011 $531,829 
2012  139,812 
2013�� 52,931 
2014  14,822 
2015  40,246 
Thereafter  3,446 
The aggregate amount of deposits ofnamed executive officers and directors of the Company and their related interests was approximately $3,679 and $3,611 at year-end 2010 and 2009, respectively.
(Continued)

86

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 8 — BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase and treasury tax and loan deposits are financing arrangements. Securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. Securities sold under agreements to repurchase consist of short-term excess funds and overnight liabilities to deposit customers arising from a cash management program.
Information concerning securities sold under agreements to repurchase at year-end 2010, 2009 and 2008 is as follows:
             
  2010  2009  2008 
             
Average balance during the year $22,342  $28,008  $74,881 
Average interest rate during the year  0.10%  0.10%  1.57%
Maximum month-end balance during the year $26,161  $35,935  $98,925 
Weighted average interest rate at year-end  0.10%  0.10%  0.10%
FHLB advances and notes payable consist of the following at year-end:
         
  2010  2009 
Short-term borrowings
        
Fixed rate FHLB advance, 4.44%
Matures December 2011		 $15,000  $— 
         
Variable rate FHLB advances at 5.00% to 5.31%
Matured December 2010		  —   12,000 
       
Total short-term borrowings  15,000   12,000 
       
         
Long-term borrowings
        
Fixed rate FHLB advances, from 1.50% to 3.36%,
Various maturities through June 2023		  51,327   50,766 
Fixed rate FHLB advances from 4.18% to 6.35%,
Various maturities through 2020		  92,326   109,233 
Total long term borrowings  143,653   159,999 
       
         
Total borrowings $158,653  $171,999 
       
Each advance is payable at its maturity date; however, prepayment penalties are required if paid before maturity. The fixed rate advances include $155,000 of advances that are callable by the FHLB under certain circumstances. The advances are collateralized by a required blanket pledge of qualifying mortgage, commercial, agricultural and home equity lines of credit loans and securities totaling $500,354 and $552,721 at year-end 2010 and 2009, respectively.
(Continued)

87

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 8 — BORROWINGS(Continued)
Scheduled maturities of FHLB advances and notes payable over the next five years and thereafter are as follows:
     
  Total 
     
2011 $15,288 
2012  65,278 
2013  288 
2014  10,296 
2015  20,309 
Thereafter  47,194 
    
  $158,653 
    
At year-end 2010, the Company had approximately $70,000 of federal funds lines of credit available from correspondent institutions of which $10,000 was secured.
In September 2003, the Company formed Greene County Capital Trust I (“GC Trust I”). GC Trust I issued $10,000 of variable rate trust preferred securities as part of a pooled offering of such securities. The Company issued $10,310 subordinated debentures to the GC Trust I in exchange for the proceeds of the offering, which debentures represent the sole asset of GC Trust I. The debentures pay interest quarterly at the three-month LIBOR plus 2.85% adjusted quarterly (3.14% and 3.13% at year-end 2010 and 2009, respectively). Subject to the limitations on repurchases resulting from the Company’s participation in the CPP, the Company may redeem the subordinated debentures, in whole or in part, at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2033.
In June 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 subordinated debentures to the GC Trust II in exchange for the proceeds of the offering, which debentures represent the sole asset of GC Trust II. The debentures pay interest quarterly at the three-month LIBOR plus 1.68% adjusted quarterly (1.98% and 1.93% at year-end 2010 and 2009, respectively). Subject to the limitations on repurchases resulting from the Company’s participation in the CPP, the Company may redeem the subordinated debentures, in whole or in part, beginning September 2010 at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2035.
In May 2007, the Company formed GreenBank Capital Trust I (“GB Trust I”). GB Trust I issued $56,000 of variable rate trust preferred securities as part of a pooled offering of such securities. The Company issued $57,732 subordinated debentures to the GB Trust I in exchange for the proceeds of the offering, which debentures represent the sole asset of GB Trust I. The debentures pay interest quarterly at the three-month LIBOR plus 1.65% adjusted quarterly (1.95% and 1.90% at year-end 2010 and 2009). Subject to the limitations on repurchases resulting from the Company’s participation in the CPP, the Company may redeem the subordinated debentures, in whole or in part, beginning June 2012 at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2037.
Also in May 2007 the Company assumed the liability for two trusts affiliated with the acquisition of Franklin, Tennessee-based Civitas Bankgroup, Inc. (“CVBG”) that the Company acquired on May 18, 2007, Civitas Statutory Trust I (“CS Trust I”) and Cumberland Capital Statutory Trust II (“CCS Trust II”).
(Continued)

88

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 8 — BORROWINGS(Continued)
In December 2005 CS Trust I issued $13,000 of variable rate trust preferred securities as part of a pooled offering of such securities. CVBG issued $13,403 subordinated debentures to the CS Trust I in exchange for the proceeds of the offering, which debentures represent the sole asset of CS Trust I. The debentures pay interest quarterly at the three-month LIBOR plus 1.54% adjusted quarterly (1.84% and 1.79% at year-end 2010 and 2009). Subject to the limitations on repurchases resulting from the Company’s participation in the CPP, the Company may redeem the subordinated debentures, in whole or in part, beginning March 2011 at a price of 100% of face value. The subordinated debentures must be redeemed no later than March 2036.
In July 2001 CCS Trust II issued $4,000 of variable rate trust preferred securities as part of a pooled offering of such securities. CVBG issued $4,124 subordinated debentures to the CCS Trust II in exchange for the proceeds of the offering, which debentures represent the sole asset of CCS Trust II. The debentures pay interest quarterly at the three-month LIBOR plus 3.58% adjusted quarterly (3.87% and 3.86% at year-end 2010 and 2009). Subject to the limitations on repurchases resulting from the Company’s participation in the CPP, the Company may redeem the subordinated debentures, in whole or in part, at a price of 100% of face value. The subordinated debentures must be redeemed no later than July 2031.
Following consultation with the FRB, the Company gave notice on November 9, 2010 to the U.S. Treasury Department that the Company is suspending the payment of regular quarterly cash dividends on the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A issued to the U.S. Treasury. Since the dividends are cumulative, the dividends will be reported for the duration of the deferral period as a preferred dividend requirement that is deducted from net income for financial statement purposes.
Additionally the Company, following consultation with the FRB, has also exercised its rights to defer regularly scheduled interest payments on all of its issues of junior subordinated debentures having an outstanding principal amount of $88,662, relating to outstanding trust preferred securities (TRUPs). Under the terms of the trust documents associated with these debentures, the Company may defer payments of interest for up to 20 consecutive quarterly periods without default. During the period that the Company is deferring payments of interest on these debentures, it may not pay dividends on its common or preferred stock. The regular scheduled interest payments will continue to be accrued for payment in the future and reported as an expense for financial statement purposes.
In accordance with ASC 810, GC Trust I, GC Trust II, GB Trust I, CS Trust I and CCS Trust II are not consolidated with the Company. Accordingly, the Company does not report the securities issued by GC Trust I, GC Trust II, GB Trust I, CS Trust I and CCS Trust II as liabilities, and instead reports as liabilities the subordinated debentures issued by the Company and held by each Trust. However, the Company has fully and unconditionally guaranteed the repayment of the variable rate trust preferred securities. These trust preferred securities currently qualify as Tier 1 capital for regulatory capital requirements of the Company, subject to certain limitations and the Company expects that a portion of the trust preferred securities will continue to qualify as Tier 1 capital with the residual qualifying as Tier 2 capital following passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
(Continued)

89

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 9 — BENEFIT PLANS
The Company has a profit sharing plan which allows employees to contribute from 1% to 20% of their compensation. The Company contributes an additional amount at a discretionary rate established annually by the Board of Directors. Company contributions to the Plan were $0, $409 and $1,535 for 2010, 2009 and 2008, respectively. Effective July 2009 the Company suspended contributions to the profit sharing plan and will reevaluate re-instating these contributions in the future when the Company returns to a sustained level of profitability.
Directors have deferred some of their fees for future payment, including interest. The amount accrued for deferred compensation was $2,274 and $2,637 at year-end 2010 and 2009. Amounts expensed under the Plan were $133, $27 and $207 during 2010, 2009, and 2008, respectively. During 2009 the Company modified the annual earning crediting rate formula as follows; The annual crediting rate will be 100% of the annual return on stockholders’ equity with a 4% floor and a 12% ceiling, for the year then ended, on balances in the Plan until the director experiences a separation from services, and, thereafter, at a earnings crediting rate based on 75% of the Company’s return on average stockholders’ equity for the year then ending with a 3% floor and a 9% ceiling. During 2008 the Company used a formula which provided an annual earnings crediting rate based on 75% of the annual return on average stockholders’ equity, for the year then ended, on balances in the Plan until the director experiences a separation from service, and, thereafter, at an earnings crediting rate of 56.25% of the Company’s return on average stockholders’ equity for the year then ending. The return on annual shareholders’ equity was negative in 2008 and no earnings were credited for 2008. Also certain officers of the Company are participants under a Supplemental Executive Retirement Plan. The amount accrued for future payments under this Plan was $1,568 and $1,409 at year-end 2010 and 2009, respectively. Amounts expensed under the Plan were $259, $312 and $283 during 2010, 2009 and 2008, respectively. Related to these plans, the Company purchased single premium life insurance contracts on the lives of the related participants. The cash surrender value of these contracts is recorded as an asset of the Company.
(Continued)

90

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 10 — INCOME TAXES
Income tax expense (benefit) is summarized as follows:
             
  2010  2009  2008 
             
Current — federal $(10,054) $(12,906) $(221)
Current — state  (1,775)  (2,476)  (53)
Deferred — federal  (13,870)  (1,397)  (3,649)
Deferred — state  (2,846)  (257)  (725)
Deferred tax asset — valuation allowance  43,455   —   — 
          
             
  $14,910  $(17,036) $(4,648)
          
Deferred income taxes reflect the effect of “temporary differences” between values recorded for assets and liabilities for financial reporting purposes and values utilized for measurement in accordance with tax laws. The tax effects of the primary temporary differences giving rise to the Company’s net deferred tax assets and liabilities are as follows:
                 
  2010  2009 
  Assets  Liabilities  Assets  Liabilities 
                 
Allowance for loan losses $26,214  $—  $19,675  $— 
Deferred compensation  2,129   —   1,973   — 
REO basis  12,175   —   —   — 
Purchase accounting adjustments  —   (1,424)  672   — 
Depreciation  —   (1,998)  —   (2,129)
FHLB dividends  —   (1,658)  —   (1,658)
Core deposit intangible  2,189   —   —   (4,860)
Unrealized (gain) loss on securities  —   (645)  —   (122)
NOL carry forward  10,192   —   —   (122)
Other      (1,542)  49   — 
Deferred tax asset — valuation allowance      (43,455)  —   — 
             
                 
Total deferred income taxes $52,899  $(50,722) $22,369  $(8,769)
             
A valuation allowance is recognized for a net DTA if, based on the weight of available evidence, it is more-likely-than-not that some portion or the entire DTA will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making such judgments, significant weight is given to evidence that can be objectively verified. As a result of the increased credit losses, the Company entered into a three-year cumulative pre-tax loss position (excluding the goodwill impairment charge recognized in the second quarter of 2009) as of June 30, 2010.
A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset which is difficult to overcome. The Company’s estimate of the realization of its net DTA was based on the scheduled reversal of deferred tax liabilities and taxable income available in prior carry back years and tax planning strategies. Based on management’s calculation, a valuation allowance of $43,455, or 95% of the net DTA, was an adequate estimate as of December 31, 2010. This estimate resulted in a valuation allowance for the net DTA in the income statement of $43,455 for the period end 2010.
(Continued)

91

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 10 — INCOME TAXES(Continued)
A reconciliation of expected income tax expense (benefit) at the statutory federal income tax rate of 35% with the actual effective income tax rates is as follows:
             
  2010  2009  2008 
 
Statutory federal tax rate  (35.0%)  (35.0%)  (35.0%)
State income tax, net of federal benefit  (4.6)  (1.1)  (5.2)
Tax exempt income  (2.0)  (0.5)  (8.0)
Goodwill impairment  —   26.4   — 
Deferred tax asset — valuation allowance  66.1   —   — 
Other  (1.8)  (0.5)  — 
          
             
   (22.7%)  (10.2%)  (46.4%)
          
The Company recognizes accrued interest and penalties related to uncertain tax positions in tax expense.
The Company’s Federal returns are open and subject to examination for the years of 2007, 2008 and 2009. The Company’s State returns are open and subject to examination for the years of 2007, 2008, and 2009.
At December 31, 2010 the Company had gross federal net operating loss carry-forwards of $24,118. The carry-forwards begin to expire in 2031. At December 31, 2010 the Company had gross state net operating loss carry-forwards of $41,433. Of the total $41,433 in carry-forwards, $18,490 begin to expire in 2025 while the remaining $22,943 begin to expire in 2026.
NOTE 11 — COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer-financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
Financial instruments with off-balance-sheet risk were as follows at year-end:
         
  2010  2009 
 
Commitments to make loans — fixed $3,827  $1,202 
Commitments to make loans — variable  2,464   4,718 
Unused lines of credit  201,973   239,374 
Letters of credit  25,674   30,107 
The fixed rate loan commitments have interest rates ranging from 5.49% to 8.75% and maturities ranging from one to fifteen years. Letters of credit are considered financial guarantees under ASC 460.
(Continued)

92

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 12 — CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
Based on the most recent notifications from its regulators, the Bank is well capitalized under the regulatory framework for prompt corrective action. However, the Bank has informally committed to its primary regulators that it will maintain a Tier 1 leverage ratio (Tier 1 Capital to Average Assets) in excess of 10% and a Total risk-based capital ratio (Total Capital to Risk Weighted Assets) in excess of 14%.
During the third quarter of 2010, the Bank was subject to a joint examination by the FDIC and the TDFI. Based on initial findings presented to the Bank’s management, the Bank expects that either the FDIC or the TDFI or both will require the Bank to agree to certain improvements in its operations, particularly in relation to asset quality matters. We also believe that the Bank will be required to agree to maintain or increase capital to levels above those required to be considered well capitalized. We do not know at this time what minimum levels of capital the regulators will require. If the requirement to maintain higher capital levels than those required to be well capitalized under the prompt corrective action provisions of the FDICIA is contained in a formal enforcement action of the FDIC, the Bank may be subject to additional limitations on its operations including its ability to pay interest on deposits above proscribed rates, which could adversely affect the Bank’s liquidity and/or operating results. The terms of any such supervisory action that goes beyond the steps we have already taken may have a significant negative effect on our business, operating flexibility and results of operations. Failure by the Bank to meet applicable capital guidelines or to satisfy certain other regulatory requirements could subject the Bank to a variety of enforcement remedies available to the federal regulatory authorities.
(Continued)

93

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 12 — CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (continued)
As reflected in the table below, the Bank did not satisfy these higher ratio requirements at December 31, 2010. Actual capital levels and minimum required levels (in millions) were as follows. Because the Bank’s capital levels at December 31, 2010 were below those that the Bank had informally committed to its primary regulators that it would maintain, the Bank was required to submit a Capital Action Plan to its primary regulators.
                         
                  Minimum Amounts to 
                  be Well Capitalized 
          Minimum Required  Under Prompt 
     for Capital  Corrective 
  Actual  Adequacy Purposes  Action Provisions 
  Actual  Ratio (%)  Actual  Ratio (%)  Actual  Ratio (%) 
2010                        
Total Capital (to Risk Weighted Assets)                        
Consolidated $239.7   13.2  $145.2   8.0  $181.6   10.0 
Bank  239.6   13.2   145.0   8.0   181.3   10.0 
Tier 1 Capital (to Risk Weighted Assets)                        
Consolidated $216.5   11.9  $72.6   4.0  $108.9   6.0 
Bank  216.4   11.9   72.5   4.0   108.8   6.0 
Tier 1 Capital (to Average Assets)                        
Consolidated $216.5   8.9  $97.6   4.0  $122.0   5.0 
Bank  216.4   8.9   97.5   4.0   121.8   5.0 
                         
2009                        
Total Capital (to Risk Weighted Assets)                        
Consolidated $318.5   14.9  $171.0   8.0  $213.8   10.0 
Bank  317.4   14.9   170.7   8.0   213.4   10.0 
Tier 1 Capital (to Risk Weighted Assets)                        
Consolidated $291.5   13.6  $85.5   4.0  $128.3   6.0 
Bank  290.4   13.6   85.4   4.0   128.0   6.0 
Tier 1 Capital (to Average Assets)                        
Consolidated $291.5   10.7  $108.6   4.0  $135.8   5.0 
Bank  290.4   10.7   108.6   4.0   135.7   5.0 
(Continued)

94

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 12 — CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS(continued)
The Company’s primary source of funds to pay dividends to shareholders is the dividends it receives from the Bank. Applicable state laws and the regulations of the Federal Reserve Bank and the Federal Deposit Insurance Corporation regulate the payment of dividends. Under the state regulations, the amount of dividends that may be paid by the Bank to the Company without prior approval of the Commissioner of the Tennessee Department of Financial Institutions is limited in any one year to an amount equal to the net income in the calendar year of declaration plus retained net income for the preceding two years; however, future dividends will be dependent on the level of earnings, capital and liquidity requirements and considerations of the Bank and Company.
In general, the Bank may not declare or pay a dividend to the Company in excess of 100% of its net retained profits for the current year combined with its net retained profits for the preceding two calendar years without prior approval of the Commissioner of the Tennessee Department of Financial Institutions. The Bank’s ability to make capital distributions in the future may require regulatory approval and may be restricted by its regulatory authorities. The Bank’s ability to make any such distributions will also depend on its earnings and ability to meet minimum regulatory capital requirements in effect during future periods. These capital adequacy standards may be higher in the future than existing minimum regulatory capital requirements. The FDIC also has the authority to prohibit the payment of dividends by a bank when it determines such payments would constitute an unsafe and unsound banking practice. In addition, income tax considerations may limit the ability of the Bank to make dividend payments in excess of its current and accumulated tax “earnings and profits” (“E&P”). Annual dividend distributions in excess of E&P could result in a tax liability based on the amount of excess earnings distributed and current tax rates. The Company has informally committed to the FRB-Atlanta that it will not pay dividends on its common or preferred stock (or interest on its subordinated debentures) without the prior approval of the FRB-Atlanta. The Company also informally committed to the FRB-Atlanta that it will not incur any indebtedness without the prior approval of the FRB-Atlanta.
On November 9, 2010, the Company following consultation with the FRB announced that it had suspended preferred stock dividends and interest payments on its junior subordinated debentures associated with its trust preferred securities in order to preserve capital.
On December 23, 2008 the Company entered into a definitive agreement (the “Agreement”) with the U.S. Treasury to participate in the Capital Purchase Program (“CPP”). Pursuant to the Agreement, the Company sold 72,278 shares of Series A preferred stock with an attached warrant to purchase 635,504 shares of our common stock priced at $17.06 per common share, to the U.S. Treasury for an aggregate consideration of $83 million.
NOTE 13 — STOCK-BASED COMPENSATION
The Company maintains a 2004 Long-Term Incentive Plan, as amended (the “Plan”), whereby a maximum of 500,000 shares of common stock may be issued 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%. Shares of restricted stock awarded under the Plan have restrictions that expire within the vesting period of the award which range from 12 months to 60 months. At December 31, 2010, 170,324 shares remained available for future grant. The compensation cost related to options that has been charged against income for the Plan was approximately $295, $387 and $456 for the years ended December 31, 2010 and 2011.

                    Change in       
                    Pension       
                    Value and       
                 Non-Equity  Nonqualified       
                 Incentive  Deferred       
           Stock  Option  Plan  Compensation  All Other    
Name and Principal    Salary  Bonus  Awards  Awards  Compensation  Earnings  Compensation    

Position (1)

 Year  ($)  ($)  ($) (2)  ($) (2)  ($)  ($)  ($)  Total 

R. Eugene Taylor (3)

Chairman of the Board and

Chief Executive Officer

  2011   $27,083   $27,083   $290,511   $229,892   $—     $—     $—     $574,569  

Christopher G. Marshall (3)

Chief Financial Officer

  2011   $18,250   $18,250   $108,942   $86,209   $—     $—     $—     $231,651  

R. Bruce Singletary (3)

Chief Risk Officer

  2011   $12,500   $12,500   $72,628   $57,473   $—     $—     $—     $155,101  

Stephen M. Rownd

Former Chairman of the Board

Chief Executive Officer and President of the Company and the Bank

  
 		2011
2010		  
  		 $
 		400,000
301,988		  
  		 $

 

—  

—  

  

  

 $
 		50,000
149,997		  
  		 

 

 

 

—  

 

  

 

 

 

 

—  

 

  

 

 

 

 

—  

 

  

 $
 		26,255
14,430		  
  		 $
 		476,255
466,415		  
  

Kenneth R. Vaught

Former Director, President and

Chief Banking Officer of the Company and the Bank

  
 		2011
2010		  
  		 $
 		176,289
267,000		  
  		 $

 

—  

—  

  

  

 $

 

—  

—  

  

  

 $

 

—  

—  

  

  

 $

 

—  

—  

  

  

 $

 

—  

—  

  

  

 $
 		107,820
112,160		  
  		 $
 		284,109
379,160		  
  

Michael J. Fowler

Former Senior Vice President,

Chief Financial Officer of the Company and the Bank

  2011   $166,667   $—     $75,000   $—     $—     $—     $6,820   $248,487  

1.Messrs. Taylor, Marshall and Singletary were appointed these positions as of the closing of CBF’s Investment on September 7, 2011. Mr. Rownd was appointed Chief Executive Officer of the Company and the Bank on March 31, 2010, was elected as Chairman of the Board of Directors of the Company and the Bank on April 30, 2010, and was appointed President of the Company and the Bank on August 9, 2011. Mr. Vaught served as Director, President and Chief Banking Officer of the Company and the Bank until leaving the Company on August 9, 2011. Mr. Fowler was appointed Chief Financial Officer of the Company and the Bank on May 16, 2011. Effective as of the closing of the Investment, Mr. Rownd was appointed the Market President for Tennessee of Capital Bank and Mr. Fowler was appointed a Senior Vice President of Capital Bank.
2.Amounts listed in the “Stock Awards” and “Option Awards” columns reflect the full grant date fair value of the award received. For a further discussion of these awards, see Note 15 to the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2011.
3.None of the compensation paid to Messrs. Taylor, Marshall and Singletary is paid by the Company. The base salary, annual bonus, stock awards and option awards are paid by CBF. The portion disclosed in the Summary Compensation Table reflect the portion of compensation that is allocable to their services to the Company.

- 8 -

All Other Compensation

The following table sets forth each component of the “All Other Compensation” column of the Summary Compensation Table for 2011

       Amounts         
       Accrued         
   Directors   under   Temporary     
   Fees Paid or   Non-Compete   Living     

Name

  Earned   Agreement   Expenses   Total 

Stephen M. Rownd

  $16,620    $—      $9,635    $26,255  

Kenneth R. Vaught

   16,080     91,740     —       107,820  

Michael J. Fowler

   —       —       6,820     6,820  

Annual Incentive Plan. The Company previously maintained an Annual Incentive Plan, that was intended to compensate executive officers for specific achievements on behalf of the Company’s performance and their individual achievements, encourage the retention of key executives and other officers, and align the executive officers’ interests with those of the Company’s shareholders. The Board suspended the Annual Incentive Plan for 2011 due to deteriorating economic conditions and the difficulty such economic conditions would present in determining performance metrics and goals.

Non-Compete Agreement

The Company entered into a non-compete agreement with Mr. Vaught in 2004, pursuant to which the Company agreed to provide certain retirement benefits upon Mr. Vaught’s ceasing to be employed by the Company. In connection with Mr. Vaught’s termination of employment with the Company in August, 2011, the Company offered annual payments of $84,924 over a ten-year period (beginning after Mr. Vaught attains age 50) pursuant to the non-competition agreement. Mr. Vaught rejected the offer and elected to take legal action against the Company seeking enhanced “change in control” benefits under the agreement. Certain matters relating to the non-compete agreement remain in dispute, including whether the non-compete agreement remains in effect, is enforceable and whether any payments at all are due to Mr. Vaught. No other named executive officer has entered into a non-compete agreement with the Company.

Employment Agreements

The Company entered into an employment agreement with Kenneth R. Vaught in December 2007 (the “Employment Agreement”), which agreement replaced the prior employment agreement with Mr. Vaught. Under the terms of the Employment Agreement, Mr. Vaught was entitled to an initial base salary of $237,000 as well as director fees for service on the Company’s and its subsidiaries’ boards of directors, life insurance, participation in Company-sponsored benefit plans, including equity-based plans and cash incentive plans, other fringe benefits and, where applicable, severance and change in control benefits.

As noted above, Mr. Vaught’s employment with the Company terminated in August 2011 and, as a result of the Company’s outstanding obligations under the Capital Purchase Program (“CPP”) at the time that Mr. Vaught’s employment was terminated, the Company was prohibited by the terms of EESA, including the June 2009 IFR, from making severance or change of control payment to Mr. Vaught. Accordingly, Mr. Vaught was not entitled to any severance or change in control benefits upon his termination of employment with the Company in August 2011.

No other named executive officer has an individual employment agreement with the Company. However, Mr. Taylor has entered into an employment agreement with CBF, which provides for base salary, annual bonus opportunity, as well as severance in the event of a termination of his employment with CBF.

- 9 -

Perquisites and 2008, respectively.Other Personal Benefits

Perquisites and other personal benefits represent a small part of the Company’s overall compensation package, and are offered only after consideration of business need. The Company provides executive officers with perquisites and other personal benefits that the Company believes to be reasonable and consistent with its overall compensation cost relatedprogram to restricted stockbetter enable the Company to attract and retain superior employees for key positions.

Personal benefits offered to executives serve a different purpose than do the other elements of executive compensation. In general, they are designed to provide a safety net of protection against the financial catastrophes that has been charged against income forcan result from illness, disability or death. Personal benefits offered to executives are largely those that are offered to the general employee population, with some variation primarily to promote tax efficiency.

Outstanding Equity Awards at Fiscal Year-End

There were no outstanding Equity Incentive Plan was approximately $331, $299, and $303 forawards held by the years ended December 31, 2010, 2009, and 2008, respectively. Asnamed executive officers as of December 31, 2010, there was $6782011.

Equity Awards under the Equity Incentive Plan. Equity compensation is intended to enhance the long-term proprietary interest in the Company on the part of total unrecognized compensation cost relatedthe employee and others who can contribute to non-vested share-based compensation arrangements, which is expectedthe Company’s overall success, and to be recognized over a weighted-average period of 2.3 years.

(Continued)

95

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 13 — STOCK-BASED COMPENSATION(Continued)
Stock Options
The fair marketincrease the value of each optionthe Company to its shareholders. Under the Green Bankshares Inc. Equity Incentive Plan (the “Equity Incentive Plan”), the Board of Directors has the authority to grant stock options and restricted stock to any employee or director of the Company. Equity award is estimatedlevels are generally determined based on market data and vary among participants based on their positions within the dateCompany. From time to time, the Board of Directors may grant using the Black-Scholes option pricing model. an additional award to one or more employees based on special circumstances.

The Company didawards equity grants without regard to any scheduled or anticipated release of material information. The Company does not grant any incentive stock options for 2010, 2009,accelerate or 2008.

A summarydelay equity grants in response to material information, nor does it delay the disclosure of stock option activity under the Plan for the three years ended December 31, 2010 is presented below:
                 
          Weighted    
      Weighted  Average    
      Average  Remaining  Aggregate 
  Stock  Exercise  Contractual  Intrinsic 
  Options  Price  Term  Value 
Outstanding at January 1, 2008  452,077  $25.72         
Exercised  (9,759)  12.63         
Forfeited  (1,565)  30.65         
Expired  (16,310)  23.00         
                
                 
Outstanding at December 31, 2008  424,443  $26.10         
Forfeited  (1,374)  32.05         
Expired  (34,875)  25.58         
                
                 
Outstanding at December 31, 2009  388,194  $26.14         
Exercised  —   —         
Forfeited  (6,484)  33.12         
Expired  —   —         
                
Outstanding at December 31, 2010  381,710  $25.96  3.6 years  $— 
                
Options exercisable at December 31, 2010  344,029  $25.17  3.4 years  $— 
                
During the years-ended December 31, 2010 and 2009, thereinformation due to plans to make equity grants.

No equity awards were no exercised stock options. The total fair value of stock options vesting during the years ended December 31, 2010 and 2009 was $376 and $450, respectively.

(Continued)

96

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amountsgranted to named executive officers in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 13 — STOCK-BASED COMPENSATION(Continued)
Stock options outstanding at year-end 2010 were as follows:
                         
  Outstanding  Exercisable 
      Weighted          Weighted    
      Average  Weighted      Average  Weighted 
      Remaining  Average      Remaining  Average 
Range of Number  Contractual  Exercise  Number  Contractual  Exercise 
Exercise Prices Outstanding  Life  Price  Outstanding  Life  Price 
                         
$12.41 – $15.00  24,142   1.8  $12.95   24,142   1.8  $12.95 
                         
$15.01 – $20.00  77,698   1.8  $17.63   77,698   1.8  $17.63 
                         
$20.01 – $25.00  50,635   3.1  $23.36   50,635   3.1  $23.36 
                         
$25.01 – $30.00  135,476   4.7  $28.00   122,137   4.6  $27.91 
                         
$30.01 – $36.32  93,759   4.4  $34.80   69,417   3.8  $34.37 
                       
                         
Total  381,710           344,029         
                       
(Continued)

97

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 13 — STOCK-BASED COMPENSATION(Continued)
Restricted Stock
A summary2011, other than 24,155 shares of restricted stock activity underawarded to Mr. Rownd on April 28, 2011 and 30,865 shares of restricted stock awarded to Mr. Fowler on May 17, 2011. The Equity Incentive Plan was terminated on February 21, 2012.

Options Exercises and Stock Vested in 2011

None of the Plan forCompany’s named executive officers exercised any stock options during the year ended December 31, 2010, 2009,2011. The following shares of restricted stock (with value in brackets) held by Messrs. Rownd, Vaught and 2008 is presented below.

Fowler vested in 2011.

         
      Weighted 
      Average 
      Price Per 
  Shares  Share 
 
Balance at January 1, 2008  —  $— 
Granted:        
Non-employee Directors  7,852   16.56 
Executive officers & management  62,015   19.20 
Cancelled:        
Non-employee Directors  —   — 
Executive officers & management  (8,960)  19.44 
       
         
Balance at December 31, 2008  60,907   18.83 
Granted:        
Non-employee Directors  7,060   7.08 
Non-executive officers & management  56,934   7.08 
Vested:        
Non-employee Directors  (7,852)  16.56 
Executive officers, non-executive officers & management  (10,584)  19.16 
Cancelled:        
Non-employee Directors  —   — 
Non-executive officers & management  (5,207)  14.98 
         
Balance at December 31, 2009  101,258  $11.74 
Granted:        
Non-employee Directors  6,548   6.11 
Executive officers  18,382   8.16 
Vested:        
Non-employee Directors  (7,060)  7.08 
Executive officers, non-executive officers & management  (20,335)  12.77 
Cancelled:        
Executive officers  (1,543)  16.56 
Non-executive officers & management  (5,968)  11.82 
       
         
Balance at December 31, 2010  91,282  $10.67 
       
         
Weighted-average fair value of nonvested stock awards granted during the year ended December 31,        
2010 $7.62     
        
2009 $7.08     
        
2008 $18.90     
        
(Continued)

Mr. Rownd: 42,537 shares ($51,570)

 

98Mr. Vaught: 514 share ($1,928)

Mr. Fowler: 30,865 ($37,347)

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except shareStock Ownership and per share data)
December 31, 2010, 2009 and 2008
NOTE 13 — STOCK-BASED COMPENSATION (Continued)
Cash Settled Stock Appreciation Rights
During 2010, only non-employee Directors received cash-settled stock appreciation rights (“SAR’s”)Retention Guidelines. During the years ended December 31, 2009 and 2008While the Company granted SAR’s awards to non-employee Directors,believes that its employees and executive officers and select employees. During the year ended December 31, 2007 only select employees received SAR’s. Each award, when granted, provides the participant with the right to receive paymentshould hold stock in cash, upon exercise of each SAR, for the difference between the appreciation in market value of a specified number of shares of the Company’s Common Stock over the award’s exercise price. The SAR’s vest over the same period as the stock option awards issued and the restricted stock grants and can only be exercised in tandem with the stock option awards or vesting of the restricted stock grants. The per-share exercise price of an SAR is equal to the closing market price of a share of the Company’s common stock on the date of grant. For the year ended December 31, 2010 the Company recorded an expenseto better align their interests with those of $15our shareholders, the Company does not currently have any stock ownership or retention guidelines for its executive officers or employees.

Other Compensation Programs and forPractices

Retirement Plans and Other Benefit Plans

401(k) Plan. The Green Bankshares 401(k) Retirement Plan (the “401(k) Plan”) is a tax-qualified retirement savings plan pursuant to which all employees, including the year ended December 31,named executive officers, are able to contribute on a before-tax basis up to 20% of their annual salary or the limit prescribed by the Internal Revenue Service.

Historically the Company participated in the Safe Harbor Rule which guaranteed a 3% of eligible compensation contribution. Additionally, the Company would also historically provide a discretionary 3% contribution. All contributions are deposited into investment funds, including company stock, based on Plan participants’ directions. In July 2009, the Company recognizedcontributions were suspended due to poor Company performance.

The option to select the Company’s stock as an investment in the 401(k) Plan was eliminated effective February 1, 2012.

- 10 -

Deferred Compensation Plan

Mr. Vaught participated in a recoverynon-qualified deferred compensation plan maintained by the Company, pursuant to which Mr. Vaught could elect to defer a portion of his annual income. In connection with the termination of his employment, the Company paid Mr. Vaught a lump sum payment equal to $136,585 pursuant to the terms of the deferred compensation plan. No other named executive officer participates in expense of $24 related to outstanding awarded SAR’s. the non-qualified deferred compensation plan maintained by the Company.

Potential Payments Upon Termination or Change in Control

As of December 31, 2010, there was no unrecognized compensation cost related to SAR’s. The cost is measured at each reporting period until the award is settled. As of December 31, 2010, no cash settled SAR’s had been exercised and as such, no share-based liabilities were paid.

A summary2011, none of the SAR activity during years ended December 31, 2010, 2009,named executive officers had arrangement or agreement for severance upon a termination of employment or payments on a change in control with the Company. As previously noted, Mr. Taylor’s employment agreement with CBF provides for severance upon a termination of employment CBF (with such severance payment to be made by CBF) and 2008 is presented below.
         
      Weighted 
      Average 
      Price Per 
  SAR’s  Share 
         
Balance at January 1, 2008  19,000   34.63 
Granted:        
Non-employee Directors  7,852   16.56 
Executive officers & management  62,015   19.20 
Cancelled/Expired:        
Non-employee Directors  —   — 
Executive officers & management  (8,960)  19.44 
       
         
Balance at December 31, 2008  79,907  $22.58 
Granted:        
Non-employee Directors  7,060   7.08 
Non-executive officers & management  56,934   7.08 
Cancelled/Expired:        
Non-employee Directors  (7,852)  16.56 
Non-executive officers & management  (15,817)  17.78 
       
 
Balance at December 31, 2009  120,232  $15.36 
Granted:        
Non-employee Directors  6,548   6.11 
Non-executive officers & management  —   — 
Cancelled/Expired:        
Non-employee Directors  (7,060)  7.08 
Non-executive officers & management  (27,777)  12.75 
       
         
Balance at December 31, 2010  91,943  $16.12 
       
(Continued)

certain outstanding CBF equity awards held by Messrs. Taylor, Marshall and Singletary vest on a change in control.

99

Equity Compensation Plan Information

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
Note 13 — Stock-Based Compensation (CONTINUED)
         
Weighted-average fair value of cash-settled SAR’s granted during the year ended December 31,        
2010     $6.11 
        
2009    $7.08 
        
2008    $18.93 
        
The following table illustrates the assumptionsprovides information for the Black-Scholes model used in determining the fair valueall equity compensation plans of the SAR’s at the time of grant for the periods ending December 31.
         
  2010  2009 2008
Risk-free interest rate  0.307%  0.67% – 1.89% 3.81% – 3.85%
         
Volatility  57.06%  40.18% 29.46% – 32.81%
Expected life  1 year  1 – 5 years 1 – 5 years
Dividend yield  0.00%  7.34% 3.54%
Cash-settled SAR’s awarded in stock-based payment transactions are accounted forCompany (including individual arrangements) under ASC 718 which classifies these awards as liabilities. Accordingly, the Company records these awards as a component of other non-current liabilities on the balance sheet. For liability awards, the fair value of the award, which determines the measurement of the liability on the balance sheet, is remeasured at each reporting period until the award is settled. Fluctuations in the fair value of the liability award are recorded as increases or decreases in compensation cost, either immediately or over the remaining service period, depending on the vested status of the award.
The risk-free interest rate is based upon a U.S. Treasury instrument with a life that is similarauthorized to the expected life of the SAR. Expected volatility is based upon the historical volatility of the Company’s common stock based upon prior year’s trading history. The expected term of the SAR is based upon the average life of previously issued stock options and restricted stock grants. The expected dividend yield is based upon current yield on the date of grant. These SAR’s can only be settled in tandem with the vesting of restricted stock awards and only if the value at settlement date is greater than the value at award date.
(Continued)
issue equity securities.

Equity Compensation Plans

 

Plan Category

  Number of Securities
To Be Issued upon Exercise
of Outstanding Options,
Warrants and Rights (1)		   Weighted Average
Exercise Price
of Outstanding Options,
Warrants and Rights		   Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(Excluding Securities Reflected
in First Column) (1)		 

Equity compensation plans approved by security holders (2)

   340,594    $26.87     0(2) 

Equity compensation plans not approved by security holders (3)

   36,000     16.33     N/A  
  

 

 

   

 

 

   

 

 

 

Total

   376,594    $25.86     0  
  

 

 

   

 

 

   

 

 

 

100

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 14 — EARNINGS (LOSS) PER SHARE
A reconciliation of the numerators and denominators of the earnings (loss) per common share and earnings (loss) per common share assuming dilution computations are presented below.
             
  2010  2009  2008 
Basic Earnings (Loss) Per Share
            
             
Net income (loss) $(80,695) $(150,694) $(5,360)
Less: preferred stock dividends and accretion of discount on warrants  5,001   4,982   92 
          
Net income (loss) available to common shareholders $(85,696) $(155,676) $(5,452)
          
             
Weighted average common shares outstanding  13,093,847   13,068,407   12,932,576 
          
             
Basic earnings (loss) per share $(6.54) $(11.91) $(0.42)
          
             
Diluted Earnings (Loss) Per Share
            
             
Net income (loss) $(80,695) $(150,694) $(5,360)
Less: preferred stock dividends and accretion of discount on warrants  5,001   4,982   92 
          
Net income (loss) available to common shareholders $(85,696) $(155,676) $(5,452)
          
             
Weighted average common shares outstanding  13,093,847   13,068,407   12,932,576 
             
Add: Dilutive effects of assumed conversions of restricted stock and exercises of stock options and warrants  —   —   58,214 
          
             
Weighted average common and dilutive potential common shares outstanding(1) (2)
  13,093,847   13,068,407   12,990,790 
          
             
Diluted earnings (loss) per common share(1) (2)
 $(6.54) $(11.91) $(0.42)
          
             
(1)
1Diluted weighted average shares outstanding for 2010 and 2009 excludes 92,979 and 96,971Refers to shares of unvested restricted stock because they are anti-dilutive and is equal to weighted average common shares outstanding.
2Stock options and warrants of 1,017,645, 1,058,992 and 387,121 were excluded from the 2010, 2009 and 2008 diluted earnings per share because their impact was anti-dilutive.Common Stock.
(Continued)

101

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 15 — PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEETS
Years ended December 31, 2010 and 2009
         
  2010  2009 
         
ASSETS        
Cash and due from financial institutions $1,707  $3,081 
Investment in subsidiary  228,590   308,831 
Other  4,795   4,692 
       
         
Total assets $235,092  $316,604 
       
         
LIABILITIES        
Subordinated debentures $88,662  $88,662 
Other liabilities  2,533   1,173 
       
         
Total liabilities  91,195   89,835 
         
Shareholders’ equity  143,897   226,769 
       
         
Total liabilities and shareholders’ equity $235,092  $316,604 
       
STATEMENTS OF INCOME
Years ended December 31, 2010, 2009, and 2008
             
  2010  2009  2008 
             
Dividends from subsidiary $2,500  $3,000  $13,600 
Other income  96   180   241 
Interest expense  (1,980)  (2,577)  (4,555)
Other expense  (2,002)  (1,718)  (2,022)
          
Income (loss) before income taxes  (1,386)  (1,115)  7,264 
Income tax benefit  (743)  (1,488)  (2,330)
Equity in undistributed net income (loss) of subsidiary  (80,052)  (151,067)  (14,954)
          
Net income (loss)  (80,695)  (150,694)  (5,360)
Preferred stock dividends and accretion of discount on warrants  5,001   4,982   92 
          
Net income (loss) available to common shareholders $(85,696) $(155,676) $(5,452)
          
(Continued)

102

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 15 — PARENT COMPANY CONDENSED FINANCIAL STATEMENTS(Continued)
STATEMENTS OF CASH FLOWS
Years ended December 31, 2010, 2009, and 2008
             
  2010  2009  2008 
Operating activities
            
Net income (loss) $(80,695) $(150,694) $(5,360)
Adjustments to reconcile net income to net cash provided (used) by operating activities:            
Undistributed (net income) loss of subsidiaries  80,052   151,067   14,954 
Stock compensation expense  626   686   759 
Change in other assets  104   1,868   (1,413)
Change in liabilities  1,250   (412)  (14)
          
Net cash provided (used) by operating activities  1,337   2,515   8,926 
             
Investing activities
            
Capital investment in bank subsidiary  —   —   (77,278)
          
Net cash used in investing activities  —   —   (77,278)
             
Financing activities
            
Preferred stock dividends paid  (2,711)  (3,232)  — 
Common stock dividends paid  —   (1,713)  (6,779)
Proceeds from issuance of preferred stock  —   —   72,278 
Proceeds from issuance of common stock  —   —   111 
             
Tax benefit resulting from stock options  —   —   5 
          
Net cash provided (used in) financing activities  (2,711)  (4,945)  65,615 
          
             
Net change in cash and cash equivalents
  (1,374)  (2,430)  (2,737)
             
Cash and cash equivalents, beginning of year  3,081   5,511   8,248 
          
             
Cash and cash equivalents, end of year
 $1,707  $3,081  $5,511 
          
NOTE 16 — OTHER COMPREHENSIVE INCOME
Other comprehensive income components were as follows.
             
  2010  2009  2008 
Unrealized holding gains and (losses) on securities available for sale, net of tax of $523, $1,105 and ($357), respectively $810  $1,712  $(553)
Reclassification adjustment for losses (gains) realized in net income, net of tax of $0, ($555) and ($1,044), respectively  —   (860)  (1,617)
          
             
Other comprehensive income (loss) $810  $852  $(2,170)
          
(Continued)

103

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 17 — 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, mortgage banking, investments, and deposits provide the revenues in the banking operation, loans and fees provide the revenues in consumer finance 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 for disclosure on an individual basis, and are therefore shown below in “other”. All operations are domestic.
The accounting policies used are the same as those described in the summary of significant accounting policies. 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.
                     
      Other  Holding      Total 
2010 Banking  Segments  Company  Eliminations  Segments 
Net interest income $77,246  $8,327  $(1,980) $—  $83,593 
Provision for loan losses  69,568   1,539   —   —   71,107 
Noninterest income  31,467   1,899   96   (918)  32,544 
Noninterest expense  105,088   4,643   2,002   (918)  110,815 
Income tax expense (benefit)  14,068   1,585   (743)  —   14,910 
                
Segment profit (loss) $(80,011) $2,459  $(3,143) $—  $(80,695)
                
                     
Segment assets $2,356,543  $42,995  $6,502  $—  $2,406,040 
                
                     
      Other  Holding      Total 
2009 Banking  Segments  Company  Eliminations  Segments 
Net interest income $74,628  $8,474  $(2,577) $—  $80,525 
Provision for loan losses  47,483   2,763   —   —   50,246 
Noninterest income  30,258   2,127   180   (987)  31,578 
Noninterest expense  223,989   4,868   1,717   (987)  229,587 
Income tax expense (benefit)  (16,712)  1,164   (1,488)  —   (17,036)
                
Segment profit (loss) $(149,874) $1,806  $(2,626) $—  $(150,694)
                
                     
Segment assets $2,568,926  $42,251  $7,962  $—  $2,619,139 
                
                     
      Other  Holding      Total 
2008 Banking  Segments  Company  Eliminations  Segments 
Net interest income $91,900  $7,680  $(4,555) $—  $95,025 
Provision for loan losses  50,074   2,736   —   —   52,810 
Noninterest income  32,012   2,231   241   (870)  33,614 
Noninterest expense  79,548   5,137   2,022   (870)  85,837 
Income tax expense (benefit)  (3,118)  800   (2,330)  —   (4,648)
                
Segment profit (loss) $(2,592) $1,238  $(4,006) $—  $(5,360)
                
                     
Segment assets $2,895,163  $39,846  $9,662  $—  $2,944,671 
                
(Continued)

104

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 17 — SEGMENT INFORMATION(continued)
Asset Quality Ratios
             
As of and for the period ended December 31, 2010 Bank  Other  Total 
             
Nonperforming loans as percentage of total loans, net of unearned income  8.40%  1.30%  8.35%
Nonperforming assets as a percentage of total assets  8.52%  1.34%  8.56%
Allowance for loan losses as a percentage of total loans, net of unearned income  3.68%  7.33%  3.83%
Allowance for loan losses as a percentage of nonperforming loans  43.80%  562.24%  45.83%
Net charge-offs to average total loans, net of unearned income  2.76%  4.20%  2.84%
             
As of and for the period ended December 31, 2009 Bank  Other  Total 
             
Nonperforming loans as percentage of total loans, net of unearned income  3.69%  1.50%  3.70%
Nonperforming assets as a percentage of total assets  5.04%  2.02%  5.07%
Allowance for loan losses as a percentage of total loans, net of unearned income  2.30%  8.05%  2.45%
Allowance for loan losses as a percentage of nonperforming loans  62.29%  538.31%  66.39%
Net charge-offs to average total loans, net of unearned income  2.15%  5.88%  2.25%
(Continued)

105

GREEN BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2010, 2009 and 2008
NOTE 18 — SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Presented below is a summary of the consolidated quarterly financial data:
                 
  For the three months ended 
Summary of Operations 3/31/10  6/30/10  9/30/10  12/31/10 
                 
Net interest income $21,659  $21,473  $20,747  $19,714 
Provision for loan losses  3,889   4,749   36,823   25,646 
Noninterest income  7,686   8,771   9,029   7,058 
Noninterest expense  20,546   21,274   27,009   41,986 
Income tax expense (benefit)  1,714   1,410   1,098   10,688 
             
Net income (loss) $3,196  $2,811  $(35,154) $(51,548)
             
Net income (loss) available to common shareholders $1,946  $1,561  $(36,405) $(52,798)
             
Comprehensive income $4,166  $3,705  $(34,583) $(53,173)
             
                 
Basic earnings (loss) per common share $0.15  $0.12  $(2.78) $(4.03)
             
Diluted earnings (loss) per common share $0.15  $0.12  $(2.78) $(4.03)
             
Dividends per common share $0.00  $0.00  $0.00  $0.00 
Average common shares outstanding  13,082,347   13,097,611   13,097,611   13,097,611 
Average common shares outstanding — diluted  13,172,727   13,192,648   13,097,611   13,097,611 
                 
  For the three months ended 
Summary of Operations 3/31/09  6/30/09  9/30/09  12/31/09 
                 
Net interest income $19,429  $20,180  $20,338  $20,578 
Provision for loan losses  985   24,384   18,475   6,402 
Noninterest income  6,943   7,541   9,189   8,134 
Noninterest expense  17,831   169,143   22,365   20,477 
Income tax expense (benefit)  2,776   (15,656)  (4,815)  659 
             
Net income (loss) $4,780  $(150,150) $(6,498) $1,174 
             
Net income (loss) available to common shareholders $3,548  $(151,400) $(7,748) $(76)
             
Comprehensive income $5,668  $(150,557) $(5,073) $120 
             
                 
Basic earnings (loss) per common share $0.27  $(11.58) $(0.59) $(0.01)
             
Diluted earnings (loss) per share $0.27  $(11.58) $(0.59) $(0.01)
             
Dividends per common share $0.13  $0.00  $0.00  $0.00 
Average common shares outstanding  13,062,881   13,070,216   13,070,216   13,070,216 
Average common shares outstanding — diluted  13,141,840   13,070,216   13,070,216   13,070,216 
(Continued)

106

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company, with the participation of its management, including the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) as of the end of the period covered by this Report.
Based upon that evaluation and as of the end of the period covered by this Report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as a result of the deficiencies identified in internal controls that when evaluated in combination give rise to a material weakness as described above under the caption entitled “Management’s Report on Internal Control Over Financial Reporting” in Item 8 of this Report, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed in its reports that the Company files or submits to the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported on a timely basis. In light of this material weakness, in preparing the Company’s Consolidated Financial Statements included in this Report, the Company performed a thorough review of credit quality, focusing especially on the timely receipt and review of updated appraisals from outside independent third parties and internal supporting documentation to ensure that the Company’s Consolidated Financial Statements included in this Report have been prepared in accordance with U.S. GAAP.
The Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the Company’s Consolidated Financial Statements included in this Report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented in this Report.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company has included a report of management’s assessment of the design and operating effectiveness of its internal controls as part of this Report.
Changes In Internal Control Over Financial Reporting
Management’s assessment of the Company’s internal control over financial reporting identified deficiencies in the Company’s internal control over financial reporting at December 31, 2010 related to: 1) the timely receipt and review of updated appraisals received from outside independent third parties. The increased volume of impaired and nonperforming assets requiring updated valuations during the second half of 2010 resulted in an internal control deficiency related to the timely acquisition and review of these appraisals. 2) A new process was implemented with the establishment of the Special Assets Group where appraisals, once received, are sent to an independent external appraisal review service. Controls surrounding this process in regards to the potential impairment of an asset prior to the completion of our review process are in the process of being documented. 3) Documentation and review of supporting documentation relating to impaired loans and other real estate owned. Areas were identified where the documentation supporting certain impaired loans and other real estate owned charge-offs were lacking in sufficient detail and did not provide adequate evidence of secondary review. Other than the remediation plan identified below for these deficiencies, there were no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

107

Remediation plan for significant deficiencies in internal control over financial reporting:
Prior to and subsequent to December 31, 2010, and following management’s identification of the above-referenced deficiencies, management began taking steps to remediate those identified. These ongoing efforts that commenced during 2010 and continuing on in 2011 included the following:
•During the fourth quarter and as of December 31, 2010 all appraisals on impaired assets are, and will continue to be, ordered 90 days prior to the annual appraisal date, or when evidence of impairment has occurred, and submitted to the independent third party for review upon completion, in order to assure that all appraisals on impaired assets are received in accordance with the Company’s internal policies;
•Pre-reviewed appraisals indicating evidence that impairment has occurred will be separately reviewed and discussed in the monthly valuation meeting held between the Special Assets Group, Loan Review and Accounting to ensure that there is adequate documentation of the consideration for recording a potential impairment when the review process is not 100% complete but it is probable that a loss has been incurred; and
•Controls evidencing adequate secondary review and approval of impaired loan valuations and other real estate owned will be appropriately documented and evident within the Special Assets Group.
Management anticipates that these remedial actions will strengthen the Company’s internal control over financial reporting and will address the individual deficiencies identified as of December 31, 2010. Because some of these remedial actions will take place on a quarterly basis, their successful implementation will continue to be evaluated before management is able to conclude that the deficiencies have been remediated.
Management Report on Internal Control Over Financial Reporting
The report of the Company’s management on the effectiveness of the Company’s internal control over financial reporting is set forth on page 56 of this Annual Report on Form 10-K. The attestation of the Company’s independent registered public accounting firm related to the Company’s internal control over financial reporting is set forth on pages 57 and 58 of this Annual Report on Form 10-K.
ITEM 9B.
OTHER INFORMATION.
None.

108

PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this item is incorporated herein by reference to the sections captioned “Proposal 2 — Election of Directors”; “Corporate Governance — Section 16(a) Beneficial Ownership Reporting Compliance”; “Corporate Governance — Code of Conduct”; “Corporate Governance — Meetings and Committees of the Board”; and “Executive Officers of Green Bankshares” in the Company’s definitive Proxy Statement for the 2011 Annual Meeting of Shareholders (the “Proxy Statement”).
ITEM 11.
EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference to the sections captioned “Executive Compensation” and “Corporate Governance — Compensation Committee Interlocks and Insider Participation” of the Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
(a)Security Ownership of Certain Beneficial Owners.
Information required by this item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
(b)Security Ownership of Management.
Information required by this item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
(c)Changes in Control.
Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.
(d)Equity Compensation Plan Information.
(2)The following table sets forth certain information with respect to securities to be issued under the Company’s equity compensation plans as of December 31, 2010.Equity Incentive Plan was terminated on February 21, 2012.
             
  (a)  (b)  (c) 
        Number of securities 
  Number of securities  Weighted-average  remaining available for 
  to be issued upon  exercise price of  future issuance under 
  exercise of  outstanding  equity compensation plans 
  outstanding options,  options, warrants  (excluding securities 
Plan Category warrants and rights  and rights  reflected in column (a)) 
Equity compensation plans approved by security holders  345,710  $27.13   170,324 
Equity compensation plans not approved by security holders  36,000  $16.33   * 
          
             
Total  381,710  $25.96   170,324 
          
*(3)R. Stan Puckett, who retired as Chairman and Chief Executive Officer of the Company on March 31, 2010, was the sole participant under this plan, which was a part of Mr. Puckett’s employment agreement. This employment agreement was amended during 2005 to provide that future option grants to the key executive would be made at no less than fair market value on the date of grant in order to comply with Section 409A of the Internal Revenue Code of 1986, as amended.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Director Compensation

Directors Fees: For the period from January 1, 2011 through September 7, 2011, all Directors of the Company received an annual retainer of $12,000 paid in equal quarterly installments paid in a combination of cash and Company stock. Directors also received fees for attending Board and Board Committee meetings for the Company and the Bank.

Following the closing of the CBF Investment on September 7, 2011, directors who are also employees of the Company receive no compensation in their capacities as directors. For the remainder of 2011, Ms. Bachman and Mr. Lynch continued to receive a $3,000 quarterly retainer as well as fees for attending Board and Board Committee meetings. For 2012, all outside directors receive an annual retainer fee of $30,000, if they attend at least 75% of the meetings of the Board, with no additional fees for attendance at Board or Board committee meetings.

Equity Compensation.The Company did not grant any option awards to its nonemployee directors during 2011. As of December 31, 2011, all options to purchase common stock held by the Company’s nonemployee directors were fully vested.

Other. Each of our current and former directors is also covered by director and officer liability insurance and each of our current directors is entitled to reimbursement for reasonable out-of-pocket expenses in connection with meeting attendance.

The following table provides information required by this item is incorporated herein by referencerelated to the sections captioned “Proposal 2 — Electioncompensation of Directors” and “Corporate Governance — Certain Transactions” in the Proxy Statement.

Company’s nonemployee directors for the year ended December 31, 2011.

 

109

- 11 -

Director Compensation Table

Name

  Fees Earned
or Paid in
Cash (1)		   Stock
Awards		   Option
Awards		   Non-Equity
Incentive Plan
Compensation		   Nonqualified
Deferred
Compensation
Earnings (2)		   All Other
Compensation		   Total 

Current Directors (3)

              

Martha M. Bachman

  $20,245    $7,680    $—      $—      $2,890    $—      $30,815  

Peter N. Foss

   —       —       —       —       —       —       —    

William A. Hodges

   —       —       —       —       —       —       —    

Samuel E. Lynch

   19,638     4,515     —       —       —       —       24,153  

Christopher G. Marshall

   —       —       —       —       —       —       —    

R. Bruce Singletary

   —       —       —       —       —       —       —    

R. Eugene Taylor

   —       —       —       —       —       —       —    

Former Directors

              

Bruce Campbell

   15,168     4,155     —       —       —       —       19,323  

W.T. Daniels

   16,305     7,950     —       —       10,612     —       34,867  

Robert K. Leonard

   15,838     7,555     —       —       —       —       23,393  

Bill Mooningham

   17,250     8,860     —       —       —       —       26,110  

John Tolsma

   16,130     7,010     —       —       2,971     —       26,111  

Charles H. Whitfield

   15,568     7,075     —       —       4,357     —       27,000  

ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The responses to this Item are incorporated herein by reference to the section captioned “Proposal 5 — Ratification of the Appointment of the Independent Registered Public Accounting Firm” in the Proxy Statement.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)(1)The amounts shown are total fees earned, which were subject to deferral under the Directors’ Plan.
(2)Amounts represent the compensation cost recognized in 2010 in accordance with Topic 718 of the FASB Accounting Standards Codification for fees deferred under the Directors’ Plan.
(3)Effective as of the closing of the Investment, R. Eugene Taylor (Chairman), Peter N. Foss, William A. Hodges, Christopher G. Marshall and R. Bruce Singletary were appointed to the Board of Directors. Martha M. Bachman and Samuel E. Lynch, existing members of the Board of Directors, remained as such following consolidated financial statementsthe closing. All other members of the Board of Directors of the Company includedresigned effective September 7, 2011.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information as of April 27, 2012 regarding shares of Common Stock owned of record or known by the Company to be owned beneficially by (i) each director, (ii) each executive officer named in the Summary Compensation Table, (iii) all those known by the Company to beneficially own more than 5% of the Common Stock, and (iv) all directors and executive officers as a group. The persons listed below have sole voting and investment power with respect to all shares of Common Stock owned by them, except to the extent that such power may be shared with a spouse or as otherwise set forth in the footnotes. The mailing address of Martha M. Bachman and Samuel E. Lynch and each of the named executive officers is in care of Green Bankshares’ address, which is 100 North Main Street, P.O. Box 1120, Greeneville, Tennessee 37743. The mailing address of the remaining directors is in care of Capital Bank Financial Corp.’s address, which is 4725 Piedmont Row Drive, Suite 110, Charlotte, NC 28201.

- 12 -

The percentages shown below have been calculated based on 133,160,384 total shares of Common Stock outstanding as of April 27, 2012.

Name of Beneficial Owner

  Aggregate Number
of Shares Beneficially
Owned (1)		   Number of Shares
Acquirable within
60 Days (2)		   Percent of
Class		 

5% Shareholders

      

Capital Bank Financial Corp.

   119,900,000     —       90.04% 

Directors

      

Martha M. Bachman (3)

   895,488     —        * 

Peter N. Foss (4)

   —       —        * 

William A. Hodges (4)

   —       —        * 

Samuel E. Lynch

   5,368     —        * 

Christopher G. Marshall (5)

   119,900,000     —       90.04% 

R. Bruce Singletary (5)

   119,900,000     —       90.04% 

R. Eugene Taylor (5)

   119,900,000     —       90.04% 

Named Executive Officers

      

Stephen M. Rownd

   48,052     —        * 

Kenneth R. Vaught

   39,566     —        * 

Michael J. Fowler

   30,865     —        * 

All directors and executive officers as a group (10 persons) (6)

   120,919,339     —       90.81% 

*Less than one percent
(1)The securities “beneficially owned” by an individual are determined in accordance with the Company’s 2010 Annual Report to the Shareholders (the “Annual Report”) are incorporated herein by reference from Item 8definition of this Form 10-K. The remaining information appearing“beneficial ownership” set forth in the Annual Report is not deemed to be filed as part of this Form 10-K, except as expressly provided herein.
1.Report of Independent Registered Public Accounting Firm.
2.Consolidated Balance Sheets — December 31, 2010 and 2009.
3.Consolidated Statements of Income for the Years Ended December 31, 2010, 2009 and 2008.
4.Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008.
5.Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008.
6.Notes to Consolidated Financial Statements.
(a)(2)All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they may include securities owned by or for, among others, the spouse and/or minor children of the individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power. Beneficial ownership may be disclaimed as to certain of the securities.
(2)Any shares that a person has the right to acquire within 60 days are deemed to be outstanding for the purpose of computing the percentage ownership of such person but are not required under the related instructions or are inapplicable and therefore have been omitted.
(a)(3)The following exhibits either are filed as part of this Report or are incorporated herein by reference:
2.1
Merger Agreement, dated as of January 25, 2007, by and between Greene County Bancshares, Inc. and Civitas Bankgroup, Inc.(Pursuant to Item 601(b)(2) of Regulation S-K the schedules and exhibits to this agreement have been omitted from this filing) — incorporated herein by reference to the Company’s Current Report on Form 8-K filed January 26, 2007.
3.1Amended and Restated Charter — incorporated herein by reference to the Company’s Current Report on Form 8-K12G3/A filed on January 22, 2009.
3.2Amended and Restated Bylaws — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on November 20, 2007.
4.1Form of Certificatedeemed outstanding for the Series A Preferred Stock — incorporated herein by reference topurpose of computing the Company’s Current Report on Form 8-K filed on December 23, 2008.
4.2Warrant for Purchasepercentage ownership of Sharesany other person. This column reflects the number of shares of Common Stock dated December 23, 2008 — incorporated hereinthat could be purchased by referenceexercise of options to purchase Common Stock on April 27, 2012 or within 60 days thereafter.
(3)Martha Bachman is a director and the wife of retired director Phil Bachman. Includes 203,625 shares of common stock held directly or indirectly by Martha Bachman, 673,697 shares owned by Phil Bachman individually and 18,166 shares owned by Mr. and Mrs. Bachman jointly.
(4)Excludes securities owned directly or indirectly by NAFH, beneficial ownership of which is hereby disclaimed by each of Messrs. Foss and Hodges, except to the Company’s Current Report on Form 8-K filed on December 23, 2008.extent of his pecuniary interest therein, if any.
(5)Each of Messrs. Marshall, Singletary and Taylor hereby disclaims beneficial ownership of the securities owned directly or indirectly by CBF, except to the extent of his pecuniary interest therein, if any.
(6)
10.1Employment Agreement and Amendment to Employment Agreement betweenIncludes all shares reflected in this table as beneficially owned by each director of the Company, and R. Stan Puckett — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on January 7, 2008.*

110

10.2Employment Agreement between the CompanyMessrs. Rownd, Vaught and Kenneth R. Vaught — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on January 7, 2008.*
10.3Employment Agreement between the Company and Ronald E. Mayberry — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.*
10.4Non-competition Agreement between the Company and R. Stan Puckett — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.*
10.5Non-competition Agreement between the Company and Kenneth R. Vaught — incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.*
10.6Green Bankshares, Inc. Amended and Restated 2004 Long-Term Incentive Plan. — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.*
10.7Greene County Bancshares, Inc. Amended and Restated Deferred Compensation Plan for Non-employee Directors — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on December 17, 2004.*
10.8FormFowler each of Stock Option Award Agreement — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.9Deferred Fee Agreement between the Bank and John Tolsma dated December 13, 2004 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.10Amendment and Restatement of the Greene County Bank Deferred Compensation Agreements dated March 11, 1997, March 1, 1999 and November 15, 2004 between the Bank and Philip M. Bachman dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.11Amendment and Restatement of the Greene County Bank Deferred Compensation Agreement dated March 1, 1999 between the Bank and W.T. Daniels dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.12Amendment and Restatement of the Greene County Bank Deferred Compensation Agreement dated March 1, 1999 between the Bank and Terry Leonard dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.13Amendment and Restatement of the Greene County Bank Deferred Compensation Agreement dated May 1, 1999 between the Bank and Charles S. Brooks dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.14Amendment and Restatement of the Greene County Bank Deferred Compensation Agreement dated May 1, 1999 between the Bank and Jerald K. Jaynes dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.15Amendment and Restatement of the Greene County Bank Deferred Compensation Agreement dated May 1, 2003 between the Bank and Charles H. Whitfield, Jr. dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*

111

10.16Greene County Bank Executive Deferred Compensation Agreement between the Bank and R. Stan Puckett dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.17Greene County Bank Executive Deferred Compensation Agreement between the Bank and Kenneth R. Vaught dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.18Greene County Bank Executive Deferred Compensation Agreement between the Bank and Ronald E. Mayberry dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.19Greene County Bancshares, Inc. Change in Control Protection Plan — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on October 26, 2004.*
10.20Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement between the Company and Steve L. Droke — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on October 26, 2004.*
10.21Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement between the Company and Ronald E. Mayberry — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on October 26, 2004.*
10.22Summary of Compensation Arrangement for James E. Adams — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on November 15, 2005.*
10.23Amended and Restated Deferred Compensation Plan for Nonemployee Directors — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on December 21, 2005.*
10.24Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement between the Company and James E. Adams — incorporated by reference to the Company’s Current Report on Form 8-K filed March 12, 2007.*
10.25Form of Stock Appreciation Right Award Agreement — incorporated by reference to the Company’s Current Report on Form 8-K filed March 23, 2007.*
10.26Amended and Restated Trust Agreement of GreenBank Capital Trust I (“GB Trust I”) dated as of May 16, 2007 by and among the Greene County Bancshares, Inc., as Depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee and the Administrative Trusteeswhom is a named therein (the “GB Capital Trust Agreement”) — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
10.27Form of Certificate for Common Securities of GB Trust I included as Exhibit B to the GB Capital Trust Agreement — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
10.28Form of Certificate for Preferred Securities of GB Trust I included as Exhibit C to the GB Capital Trust Agreement — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
10.29Junior Subordinated Indenture dated as of May 16, 2007 between the Company and Wilmington Trust Company, as Trustee included as Exhibit D to the GB Capital Trust Agreement (the “Junior Subordinated Indenture”) — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

112

10.30Form of Certificate for $57,732,000 Note issued pursuant to the Junior Subordinated Indenture included as Sections 2.1 and 2.2 to the Junior Subordinated Indenture — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
10.31Guarantee Agreement dated as of May 16, 2007 between Greene County Bancshares, Inc., as Guarantor and Wilmington Trust Company, as Guarantee Trustee — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
10.32Form of Restricted Stock Agreement — incorporated by reference to the Company’s Current Report on Form 8-K filed January 23, 2008.*
10.33Form of Stock Appreciation Right Agreement — incorporated by reference to the Company’s Current Report on Form 8-K filed February 29, 2008.*
10.34Letter agreement, dated December 23, 2008, between the Company and the United States Department of Treasury, including Securities Purchase Agreement — Standard Terms with respect to the issuance and sale of the Series A preferred shares and the Warrant — incorporated by reference to the Company’s Current Report on Form 8-K filed December 23, 2008.
10.35Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and R. Stan Puckett dated December 23, 2008 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.*
10.36Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and Kenneth R. Vaught dated December 23, 2008 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.*
10.37Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and James E. Adams dated December 23, 2008 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.*
10.38Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and Steve L. Droke dated December 23, 2008 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.*
10.39Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and William C. Adams dated December 23, 2008 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.*
10.40Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and R. Stan Puckett dated December 3, 2009* — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.41Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and Kenneth R. Vaught dated December 4, 2009 incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.42Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and James E. Adams dated December 1, 2009 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.43Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and Steve L. Droke December 3, 2009 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.*

113

10.44Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and William C. Adams dated December 2, 2009 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.45Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement between the Company and William C. Adams — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.*
10.46Letter Agreement, effective March 15, 2010, by and among Green Bankshares, Inc., GreenBank and Stephen M. Rownd — incorporated herein by reference to the Company’s Current Report on Form 8-K filed March 18, 2010.*
10.47Consulting Agreement by and among Green Bankshares, Inc., GreenBank and R. Stan Puckett, dated April 1, 2010 — incorporated herein by reference to the Company’s Current Report on Form 8-K filed April 1, 2010.*
10.48Form of TARP CPP Executive Officer Restricted Stock Award Agreement — incorporated herein by reference to the Company’s Current Report on Form 8-K filed April 2, 2010.*
10.49R. Stan Puckett — First Amendment to the Greene County Bank Executive Deferred Compensation Agreement — incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.*
10.50R. Stan Puckett — Second Amendment to the Greene County Bancshares, Inc. Non-Competition Agreement — incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.*
10.51Director and Named Executive Officer Compensation Summary.*
11.1Statement re Computation of Per Share Earnings — incorporated by reference to Note 14 of the Notes to Consolidated Financial Statements herein.
21.1Subsidiariesexecutive officer of the Company.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Transactions

Certain of the directors and executive officers of the Company, members of their immediate families and entities with which they are involved are customers of and borrowers from the Company. As of December 31, 2011, total loans outstanding to directors and executive officers of the Company, and their associates as a group, equaled approximately $4 million. All outstanding loans and commitments included in such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time in comparable transactions with persons not related to the Company, and did not involve more than the normal risk of collectability or present other unfavorable features.

The Company has had, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers and principal shareholders of the Company, and their associates, on the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to the Company. The Company generally considers credit relationships with directors and/or their affiliates to be immaterial and as not impairing the director’s independence so long as the terms of the credit relationship are similar to other comparable borrowers. The Company presumes extensions of credit that comply with Federal Reserve Regulation O to be consistent with director independence. In other words, the Company does not consider normal, arm’s-length credit relationships entered into in the ordinary course of business to negate a director’s independence.

Regulation O requires such loans to be made on substantially the same terms, including interest rates and collateral, and following credit underwriting procedures that are no less stringent than those prevailing at the time for comparable transactions by Capital Bank with persons not related to the Company. Such loans also may not involve more than the normal risk of repayment or present other unfavorable features. Additionally, no event of default may have occurred (that is, such loans are not disclosed as nonaccrual, past due, restructured, or potential problems). The Board of Directors must review any credit to a director or his or her related interests that has become criticized in order to determine the impact that such classification has on the director’s independence.

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From time to time, certain relationships or transactions may arise that would be deemed acceptable and appropriate upon full disclosure, following review and approval by the Audit Committee (in accordance with NASDAQ Listing Rules) to ensure there is a legitimate business reason for the transaction and that the terms of the transaction are no less favorable to the Company that could be obtained from an unrelated person. Therefore, the Board of Directors has adopted the Policy and Procedures with Respect to Related Person Transactions, which is implemented through the Audit Committee of the Board of Directors and is designed to regularly monitor the appropriateness of any significant transactions with related persons (as such term is defined by SEC rules). The policy applies to any transaction required to be disclosed under Item 404(a) of Regulation S-K in which:

the Company or the Bank is a participant;

any related person (as defined in Item 404(a) of Regulation S-K) has a direct or indirect interest; and

the amount involved exceeds $120,000.

The policy requires notification to the Company’s Audit Committee, prior the consummation of any related person transaction, describing the related person’s interest in the transaction, the material facts of the transaction, the benefits to the Company of the transaction, the availability of other sources of comparable products or services, and an assessment of whether the transaction is on terms that are comparable to the terms available to an unrelated third party or employees generally. The Audit Committee then evaluates the proposed transaction and determines whether it is a related person transaction. The Audit Committee considers all of the relevant facts and circumstances available to it including (if applicable) but not limited to:

the benefits to the Company;

the impact on a director’s independence in the event the related person is a director, an immediate family member of a director or an entity in which a director is a partner, shareholder or executive officer;

the availability of other sources for comparable products or services;

the terms of the transaction; and

the terms available to unrelated third parties or to employees generally.

No member of the Audit Committee is permitted to participate in any review, consideration or approval of any related person transaction with respect to which such member or any of his or her immediate family members is the related person. The Audit Committee approves only those related person transactions that are in, or are not inconsistent with, the best interests of the Company and its shareholders, as the Audit Committee determines in good faith. If the transaction has already been consummated, the Audit Committee will undergo the same analysis as it does with a proposed transaction, and if it determines that the consummated transaction is a related person transaction, it will evaluate whether the consummated related person transaction should be ratified, amended, terminated or rescinded and whether any disciplinary action is appropriate.

On September 7, 2011, CBF 119,900,000 shares of the Company’s common stock for aggregate consideration of $217,019,000. As a result of the Investment, CBF currently owns approximately 90% of Company’s common stock. As the Company’s controlling shareholder, CBF has the power to control the election of the Company’s directors, determine our corporate and management policies and determine the outcome of any corporate transaction or other matter submitted to the Company’s shareholders for approval. CBF also has sufficient voting power to amend the Company’s organizational documents. In addition, five of our seven directors, our Chief Executive Officer, our Chief Financial Officer, and our Chief Risk Officer are affiliated with CBF.

The Company and its subsidiaries have had, and expect to have in the future, transactions in the ordinary course of business with directors and executive officers and members of their immediate families, as well as with principal shareholders. All loans and deposits included in such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, in the case of loans, as those prevailing for comparable transactions with non-affiliated persons. It is the belief of management that such loans neither involved more than the normal risk of collectability nor presented other unfavorable features.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires certain of the Company’s officers and its directors to file reports of ownership and changes in ownership with the SEC. Officers and directors are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company’s knowledge, based solely on a review of reports that were filed with the SEC, all filing requirements under Section 16(a) were complied with during 2011.

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Director Independence

Because CBF holds approximately 90% of the voting power of the Company, under NASDAQ Listing Rules, the Company qualifies as a “controlled company” and, accordingly, is exempt from the requirement to have a majority of independent directors, as well as certain other governance requirements. However, as required under NASDAQ Listing Rules, the Audit Committee of the Board of Directors is comprised entirely of independent directors. Our Board of Directors has determined that Messrs. Foss, Hodges and Lynch and Ms. Bachman meet the definition of “Independent Director” as that term is defined in NASDAQ Listing Rules. In determining director independence, the Board considers all relevant facts and circumstances, and the Board considers the issue not merely from the standpoint of a director, but also from that of persons or organizations with which the director has an affiliation. As members of management, Messrs. Taylor, Marshall and Singletary would not be considered independent under current NASDAQ Listing Rules.

Board of Directors Committees

The Board of Directors currently has two standing committees, the Executive Committee and the Audit Committee.

Executive Committee. Subject to applicable law, the Executive Committee has the authority to exercise all powers of the Board of Directors during intervals between meetings of the board. The Executive Committee did not meet during 2011. The members of the Executive Committee for 2012 are R. Eugene Taylor (Chairman), Christopher G. Marshall and R. Bruce Singletary.

Audit Committee. The Audit Committee was established by the Board of Directors to oversee the Company’s accounting and financial reporting process, including the Company’s internal control over financial reporting and audits of the Company’s financial statements. In connection with such oversight responsibilities, the Audit Committee reviews the results and scope of the audit and other services provided by the Company’s independent registered public accounting firm. The Audit Committee also has the sole authority and responsibility to select, determine compensation of, evaluate and, when appropriate, replace the Company’s independent registered public accounting firm. The Audit Committee operates pursuant to a charter that is available on our website at www.capitalbank-us.com or free of charge upon written request to the attention of Christopher G. Marshall, Green Bankshares, 100 North Main Street, Greeneville, Tennessee 37743. During 2011, the Audit Committee met seven times.

The members of the Audit Committee for 2012 are Peter N. Foss (Chairman), William A. Hodges, Martha M. Bachman and Samuel E. Lynch. The Board of Directors, in its business judgment, has made an affirmative determination that each of Messrs. Foss, Hodges and Lynch and Ms. Bachman are “Independent Directors” as that term is defined by Nasdaq Listing Rules, including the special independence requirements applicable to audit committee members. The Board of Directors also has determined, in its business judgment, that Mr. Foss is an “audit committee financial expert” as such term is defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For additional information regarding the Audit Committee, see “Audit Committee Report” below, which is incorporated into this section by reference.

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Firm Fee Summary

For the period from January 1, 2011 through November 23 2011, and for the year ended December 31, 2010, the Company retained Dixon Hughes Goodman, LLP to provide services in the categories presented below. Beginning November 23, 2011 the Company retained PricewaterhouseCoopers, LLP to provide services in the categories presented below. All amounts below represent charges from Dixon Hughes, with the exception of a 2011 audit fee of $118,333 from PricewaterhouseCoopers.

   Fiscal 2011   Fiscal 2010 

Audit fees

  $216,817    $406,675  

Audit-related fees

   88,447     34,605  

Tax fees

   56,475     31,000  

All other fees

   12,437     0  
  

 

 

   

 

 

 

Total fees

  $374,176    $472,280  
  

 

 

   

 

 

 

Audit Fees. This category includes the aggregate fees billed for professional services rendered for the audits of the Company’s consolidated financial statements for 2011 and for professional services rendered for the audits of the Company’s consolidated financial statements and internal controls over financial reporting for fiscal year 2010, for the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q during fiscal years 2011 and 2010, and for services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements for the relevant fiscal years. Note that for 2011, Dixon Hughes Goodman only performed review services and did not perform audit services.

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Audit-Related Fees. This category includes the aggregate fees billed in each of the last two fiscal years for assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported above under “Audit Fees,” and generally consist of fees for accounting consultation, review of registration statements and audits of employee benefit plans.

Tax Fees. This category includes the aggregate fees billed in each of the last two fiscal years for professional services rendered by the independent registered public accounting firm for tax compliance, tax planning and tax advice. Tax compliance services consist of assistance with federal and state income tax returns.

All Other Fees. This category includes the aggregate fees billed in each of the last two fiscal years for products and services provided by the independent registered public accounting firm that are not reported above under “Audit Fees,” “Audit-Related Fees,” or “Tax Fees.”

Policy for Approval of Audit and Nonaudit Services. The Audit Committee charter contains the Company’s policy regarding the approval of audit and nonaudit services provided by the independent registered public accounting firm. According to that policy, the Audit Committee must pre-approve all services, including all audit and nonaudit services to be performed by the independent registered public accounting firm. The Audit Committee approved all audit and nonaudit services described above in accordance with this policy. In determining whether to approve a particular audit or permitted nonaudit service, the Audit Committee will consider, among other things, whether such service is consistent with maintaining the independence of the independent registered public accounting firm. The Audit Committee will also consider whether the independent registered public accounting firm is best positioned to provide the most effective and efficient service to the Company and whether the service might be expected to enhance the Company’s ability to manage or control risk or improve audit quality.

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PART IV

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) No financial statements or schedules are filed with this report on Form 10-K/A.

The exhibits listed in the exhibit index of the Annual Report and the exhibits listed in the exhibit index of this Amendment are filed with, or incorporated by reference in, this report.

Exhibit No.

  

Description

23.1Consent of Dixon Hughes PLLC.
31.1  Chief Executive Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a).
31.2  Chief Financial Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a).
32.1Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1Certification of Chief Executive Officer under the Capital Purchase Program of the Troubled Assets Relief Program.
99.2Certification of Chief Financial Officer under the Capital Purchase Program of the Troubled Assets Relief Program.
*Management contract or compensatory plan.

 

114

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SIGNATURES

The Company is a party to certain agreements entered into in connection with the offering by Greene County Capital Trust I, Greene County Capital Trust II, GreenBank Capital Trust I, Civitas Statutory Trust I and Cumberland Capital Statutory Trust II of an aggregate of $86 million of variable rate trust preferred securities, as more fully described in this Annual Report on Form 10-K. In accordance with Item 601(b)(4)(iii) of Regulation S-K, and because the total amount of the trust preferred securities is not in excess of 10% of the Company’s total assets, the Company has not filed the various documents and agreements associated with certain of these trust preferred securities herewith. The Company has, however, agreed to furnish copies the various documents and agreements associated with the trust preferred securities to the SEC upon request.
(b)
Exhibits. The exhibits required by Item 601 of Regulation S-K are either filed as part of this Annual Report on Form 10-K or incorporated herein by reference.
(c)
Financial Statements and Financial Statement Schedules Excluded From Annual Report. There are no financial statements and financial statement schedules which were excluded from the Annual Report pursuant to Rule 14a-3(b)(1) which are required to be included herein.

115

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
authorized, in Greeneville, Tennessee, on the 30th day of April 2012.

GREEN BANKSHARES, INC.
Date: March 15, 2011By: /s/ Stephen M. Rownd
Stephen M. RowndChristopher G. Marshall
 Christopher G. Marshall
Chairman of the Board and
 Chief ExecutiveFinancial Officer
 (Duly Authorized Representative)principal financial officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.

April 30, 2012.

Signature

  

Title

SIGNATURE AND TITLE:

/s/ R. Eugene Taylor

  DATE:

President, Chief Executive Officer

R. Eugene Taylor  
/s/ Stephen M. Rownd
Stephen M. Rownd

and Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

/s/ Christopher G. Marshall

  March 15, 2011 
/s/ Kenneth R. Vaught
Kenneth R. Vaught
President, Chief Operating Officer, and Director
March 15, 2011 
/s/ James E. Adams
James E. Adams

Executive Vice President, Chief Financial Officer

Christopher G. Marshall

and Secretary
Director

(Principal Financial Officer and Accounting Officer)Principal

  March 15, 2011 

Accounting Officer)

/s/ R. Bruce Singletary

  

Executive Vice President, Chief Risk Officer

R. Bruce Singletary

and Director

/s/ Martha M. Bachman

Martha Bachman
Director

  March 15, 2011 

Director

Martha M. Bachman  

/s/ Bruce Campbell

Bruce Campbell
DirectorPeter N. Foss

  March 15, 2011 

Director

Peter N. Foss  

/s/ W. T. Daniels

W.T. Daniels
DirectorWilliam A. Hodges

  March 15, 2011 

Director

William A. Hodges  

/s/ Robert K. Leonard

Robert K. Leonard
DirectorSamuel E. Lynch

  March 15, 2011 

Director

Samuel E. Lynch  
/s/ Samuel E. Lynch
Samuel E. Lynch
Director
March 15, 2011 
/s/ Bill Mooningham
Bill Mooningham
Director
March 15, 2011 
/s/ John Tolsma
John Tolsma
Director
March 15, 2011 
/s/ Charles H. Whitfield, Jr.
Charles H. Whitfield, Jr.
Director
March 15, 2011 

 

11618

EXHIBIT INDEX
2.1
Merger Agreement, dated as of January 25, 2007, by and between Greene County Bancshares, Inc. and Civitas Bankgroup, Inc.(Pursuant to Item 601(b)(2) of Regulation S-K the schedules and exhibits to this agreement have been omitted from this filing) — incorporated herein by reference to the Company’s Current Report on Form 8-K filed January 26, 2007.
3.3Amended and Restated Charter — incorporated herein by reference to the Company’s Current Report on Form 8-K12G3/A filed on January 22, 2009.
3.4Amended and Restated Bylaws — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on November 20, 2007.
4.1Form of Certificate for the Series A Preferred Stock — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on December 23, 2008.
4.2Warrant for Purchase of Shares of Common Stock dated December 23, 2008 — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on December 23, 2008.
10.1Employment Agreement and Amendment to Employment Agreement between the Company and R. Stan Puckett — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on January 7, 2008.*
10.2Employment Agreement between the Company and Kenneth R. Vaught — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on January 7, 2008.*
10.3Employment Agreement between the Company and Ronald E. Mayberry — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.*
10.4Non-competition Agreement between the Company and R. Stan Puckett — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.*
10.5Non-competition Agreement between the Company and Kenneth R. Vaught — incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.*
10.6Green Bankshares, Inc. Amended and Restated 2004 Long-Term Incentive Plan. — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.*
10.7Greene County Bancshares, Inc. Amended and Restated Deferred Compensation Plan for Non-employee Directors — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on December 17, 2004.*
10.8Form of Stock Option Award Agreement — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.9Deferred Fee Agreement between the Bank and John Tolsma dated December 13, 2004 - incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.10Amendment and Restatement of the Greene County Bank Deferred Compensation Agreements dated March 11, 1997, March 1, 1999 and November 15, 2004 between the Bank and Philip M. Bachman dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*

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10.11Amendment and Restatement of the Greene County Bank Deferred Compensation Agreement dated March 1, 1999 between the Bank and W.T. Daniels dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.12Amendment and Restatement of the Greene County Bank Deferred Compensation Agreement dated March 1, 1999 between the Bank and Terry Leonard dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.13Amendment and Restatement of the Greene County Bank Deferred Compensation Agreement dated May 1, 1999 between the Bank and Charles S. Brooks dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.14Amendment and Restatement of the Greene County Bank Deferred Compensation Agreement dated May 1, 1999 between the Bank and Jerald K. Jaynes dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.15Amendment and Restatement of the Greene County Bank Deferred Compensation Agreement dated May 1, 2003 between the Bank and Charles H. Whitfield, Jr. dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.16Greene County Bank Executive Deferred Compensation Agreement between the Bank and R. Stan Puckett dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.17Greene County Bank Executive Deferred Compensation Agreement between the Bank and Kenneth R. Vaught dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.18Greene County Bank Executive Deferred Compensation Agreement between the Bank and Ronald E. Mayberry dated March 11, 2005 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*
10.19Greene County Bancshares, Inc. Change in Control Protection Plan — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on October 26, 2004.*
10.20Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement between the Company and Steve L. Droke — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on October 26, 2004.*
10.21Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement between the Company and Ronald E. Mayberry — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on October 26, 2004.*
10.22Summary of Compensation Arrangement for James E. Adams — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on November 15, 2005.*
10.23Amended and Restated Deferred Compensation Plan for Nonemployee Directors — incorporated herein by reference to the Company’s Current Report on Form 8-K filed on December 21, 2005.*
10.24Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement between the Company and James E. Adams — incorporated by reference to the Company’s Current Report on Form 8-K filed March 12, 2007.*

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10.25Form of Stock Appreciation Right Award Agreement — incorporated by reference to the Company’s Current Report on Form 8-K filed March 23, 2007.*
10.26Amended and Restated Trust Agreement of GreenBank Capital Trust I (“GB Trust I”) dated as of May 16, 2007 by and among the Greene County Bancshares, Inc., as Depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee and the Administrative Trustees named therein (the “GB Capital Trust Agreement”) — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
10.27Form of Certificate for Common Securities of GB Trust I included as Exhibit B to the GB Capital Trust Agreement — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
10.28Form of Certificate for Preferred Securities of GB Trust I included as Exhibit C to the GB Capital Trust Agreement — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
10.29Junior Subordinated Indenture dated as of May 16, 2007 between the Company and Wilmington Trust Company, as Trustee included as Exhibit D to the GB Capital Trust Agreement (the “Junior Subordinated Indenture”) — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
10.30Form of Certificate for $57,732,000 Note issued pursuant to the Junior Subordinated Indenture included as Sections 2.1 and 2.2 to the Junior Subordinated Indenture — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
10.31Guarantee Agreement dated as of May 16, 2007 between Greene County Bancshares, Inc., as Guarantor and Wilmington Trust Company, as Guarantee Trustee — incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
10.32Form of Restricted Stock Agreement — incorporated by reference to the Company’s Current Report on Form 8-K filed January 23, 2008.*
10.33Form of Stock Appreciation Right Agreement — incorporated by reference to the Company’s Current Report on Form 8-K filed February 29, 2008.*
10.34Letter agreement, dated December 23, 2008, between the Company and the United States Department of Treasury, including Securities Purchase Agreement — Standard Terms with respect to the issuance and sale of the Series A preferred shares and the Warrant — incorporated by reference to the Company’s Current Report on Form 8-K filed December 23, 2008.
10.35Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and R. Stan Puckett dated December 23, 2008 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 .*
10.36Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and Kenneth R. Vaught dated December 23, 2008 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 .*
10.37Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and James E. Adams dated December 23, 2008 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 .*
10.38Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and Steve L. Droke dated December 23, 2008 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 .*

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10.39Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and William C. Adams dated December 23, 2008 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.*
10.40Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and R. Stan Puckett dated December 3, 2009* — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.41Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and Kenneth R. Vaught dated December 4, 2009 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.42Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and James E. Adams dated December 1, 2009 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.43Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and Steve L. Droke December 3, 2009 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.44Senior Executive Officer Letter Agreement by and between Green Bankshares, Inc. and William C. Adams dated December 2, 2009 — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.*
10.45Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement between the Company and William C. Adams — incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.*
10.46Letter Agreement, effective March 15, 2010, by and among Green Bankshares, Inc., GreenBank and Stephen M. Rownd — incorporated herein by reference to the Company’s Current Report on Form 8-K filed March 18, 2010.*
10.47Consulting Agreement by and among Green Bankshares, Inc., GreenBank and R. Stan Puckett, dated April 1, 2010 — incorporated herein by reference to the Company’s Current Report on Form 8-K filed April 1, 2010.*
10.48Form of TARP CPP Executive Officer Restricted Stock Award Agreement — incorporated herein by reference to the Company’s Current Report on Form 8-K filed April 2, 2010.*
10.49R. Stan Puckett — First Amendment to the Greene County Bank Executive Deferred Compensation Agreement — incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.*
10.50R. Stan Puckett — Second Amendment to the Greene County Bancshares, Inc. Non-Competition Agreement — incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.*.
10.51Director and Named Executive Officer Compensation Summary.*
11.1Statement re Compuation of Per Share Earnings — incorporated by reference to Note 14 of the Notes to Consolidated Financial Statements herein.
21.1Subsidiaries of the Company.
23.1Consent of Dixon Hughes PLLC.
31.1Chief Executive Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a).
31.2Chief Financial Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a).

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32.1Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1Certification of Chief Executive Officer under the Capital Purchase Program of the Troubled Assets Relief Program.
99.2Certification of Chief Financial Officer under the Capital Purchase Program of the Troubled Assets Relief Program.
*Management contract or compensatory plan.

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