UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

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

For the transition period from                      to                     

Commission file number 0-14289

GREEN BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

N/A

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

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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

As of November 06, 2008, the number of shares outstanding of the issuer’s common stock was: 12,992,681.

 

 

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements of Green Bankshares, Inc. and its wholly owned subsidiaries are as follows:

Condensed Consolidated Balance Sheets — September 30, 2008 and December 31, 2007.

Condensed Consolidated Statements of Income and Comprehensive Income — For the three and nine months ended September 30, 2008 and 2007.

Condensed Consolidated Statement of Changes in Shareholders’ Equity — For the nine months ended September 30, 2008.

Condensed Consolidated Statements of Cash Flows — For the nine months ended September 30, 2008 and 2007.

Notes to Condensed Consolidated Financial Statements.

GREEN BANKSHARES, INC.

		September 30,				December 31,
		2008				2007*
		(Unaudited)
ASSETS
Cash and due from banks		$	46,168			$	65,717
Federal funds sold			56,751				—
Securities available for sale			292,897				235,273
Securities held to maturity (with a market value of $700 and $1,280)			757				1,303
FHLB and other stock, at cost			13,203				12,322
Loans held for sale			1,824				2,331
Loans, net of unearned income			2,323,076				2,356,376
Allowance for loan losses			(34,856	)			(34,111	)
Other real estate owned and repossessed assets			12,215				4,859
Premises and equipment, net			83,569				82,697
Goodwill and other intangible assets			156,117				157,827
Other assets			60,320				63,147
Total assets		$	3,012,041			$	2,947,741
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits		$	2,276,198			$	1,986,793
Federal funds purchased			413				87,787
Repurchase agreements			64,929				106,738
FHLB advances and notes payable			229,906				318,690
Subordinated debentures			88,662				88,662
Accrued interest payable and other liabilities			25,451				36,594
Total liabilities			2,685,559				2,625,264
Shareholders’ equity
Common stock: $2 par, 20,000,000 shares authorized, 12,999,161 and 12,931,015 shares outstanding			25,998				25,862
Additional paid-in capital			185,631				185,170
Retained earnings			114,742				109,938
Accumulated other comprehensive income			111				1,507
Total shareholders’ equity			326,482				322,477
Total liabilities and shareholders’ equity		$	3,012,041			$	2,947,741

See notes to condensed consolidated financial statements.

GREEN BANKSHARES, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Unaudited)								(Unaudited)
Interest income
Interest and fees on loans		$	38,497			$	48,630			$	120,653			$	120,226
Investment securities			3,982				3,642				10,604				6,440
Federal funds sold and other			87				22				112				49
			42,566				52,294				131,369				126,715
Interest expense
Deposits			14,345				17,812				43,657				43,977
Borrowings			3,837				7,189				13,812				13,691
			18,182				25,001				57,469				57,668
Net interest income			24,384				27,293				73,900				69,047
Provision for loan losses			8,620				1,444				20,527				3,677
Net interest income after provision for loan losses			15,764				25,849				53,373				65,370
Noninterest income
Service charges and fees			6,711				6,418				19,725				16,102
Other			1,299				1,270				3,703				3,468
			8,010				7,688				23,428				19,570
Noninterest expense
Salaries and employee benefits			10,157				9,753				29,261				25,683
Occupancy and furniture and equipment expense			3,180				2,852				9,743				7,574
Other			8,607				6,405				22,641				16,504
			21,944				19,010				61,645				49,761
Income before income taxes			1,830				14,527				15,156				35,179
Provision for income taxes			596				5,613				5,282				13,563
Net income		$	1,234			$	8,914			$	9,874			$	21,616
Comprehensive income		$	1,547			$	11,167			$	8,478			$	21,181
Per share of common stock:
Basic earnings		$	0.10			$	0.69			$	0.76			$	1.90
Diluted earnings			0.10				0.69				0.76				1.89
Dividends			0.13				0.13				0.39				0.39
Weighted average shares outstanding:
Basic			12,931,774				12,921,240				12,931,538				11,362,422
Diluted			12,947,618				13,008,733				12,936,084				11,455,389

See notes to condensed consolidated financial statements.

GREEN BANKSHARES, INC.

																		Accumulated
										Additional								Other				Total
		Common Stock								Paid-in				Retained				Comprehensive				Shareholders’
		Shares				Amount				Capital				Earnings				Income (loss)				Equity
		(Unaudited)
Balance, December 31, 2007			12,931,015			$	25,862			$	185,170			$	109,938			$	1,507			$	322,477
Common stock transactions:
Exercise of shares under stock option plan			759				2				12				—				—				14
Issuance of restricted common shares			67,387				134				(134	)			—				—				—
Compensation expense:
Stock options			—				—				342				—				—				342
Restricted stock			—				—				241				—				—				241
Dividends paid ($.39 per share)			—				—				—				(5,070	)			—				(5,070	)
Comprehensive income:
Net income			—				—				—				9,874				—				9,874
Change in unrealized gains (losses), net of reclassification and taxes			—				—				—				—				(1,396	)			(1,396	)
Total comprehensive income																							8,478
Balance, September 30, 2008			12,999,161			$	25,998			$	185,631			$	114,742			$	111			$	326,482

See notes to condensed consolidated financial statements.

GREEN BANKSHARES, INC.

		September 30,				September 30,
		2008				2007
		(Unaudited)
Cash flows from operating activities
Net income		$	9,874			$	21,616
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses			20,527				3,677
Depreciation and amortization			5,264				4,073
Security amortization and accretion, net			(726	)			(391	)
(Gain) loss on sale of securities			(74	)			42
FHLB stock dividends			(464	)			—
Net gain on sale of mortgage loans			(487	)			(891	)
Originations of mortgage loans held for sale			(43,894	)			(57,424	)
Proceeds from sales of mortgage loans			44,887				63,067
Increase in cash surrender value of life insurance			(804	)			(675	)
Net losses from sales of fixed assets			388				77
Stock-based compensation expense			583				351
Net loss (gain) on other real estate and repossessed assets			1,837				(153	)
Deferred tax expense			(746	)			(3,078	)
Net changes:
Other assets			5,031				(2,903	)
Accrued interest payable and other liabilities			(11,142	)			9,014
Net cash provided by operating activities			30,054				36,402
Cash flows from investing activities
Purchase of securities available for sale			(136,985	)			(23,682	)
Proceeds from sale of securities available for sale			3,398				2,230
Proceeds from maturities of securities available for sale			74,467				21,015
Proceeds from sale of securities held to maturity			—				496
Proceeds from maturities of securities held to maturity			545				690
Purchase of FHLB stock			(417	)			(1,741	)
Net change in loans			(13,841	)			(159,902	)
Acquisition, net of cash received			—				(24,578	)
Proceeds from sale of other real estate			19,238				3,264
Improvements to other real estate			(1,073	)			—
Proceeds from sale of fixed assets			50				14
Premises and equipment expenditures			(4,615	)			(9,702	)
Net cash used by investing activities			(59,233	)			(191,896	)
Cash flows from financing activities
Net change in deposits			289,405				(4,928	)
Net change in federal funds purchased and repurchase agreements			(129,183	)			12,720
Tax benefit resulting from stock options			—				126
Proceeds from FHLB advances and notes payable			20,916				160,416
Proceeds from subordinated debentures			—				57,732
Repayments of FHLB advances and notes payable			(109,701	)			(35,884	)
Dividends paid			(5,070	)			(4,637	)
Proceeds from issuance of common stock			14				407
Net cash provided by financing activities			66,381				185,952
Net change in cash and cash equivalents			37,202				30,458
Cash and cash equivalents, beginning of year			65,717				70,640
Cash and cash equivalents, end of period		$	102,919			$	101,098
Supplemental disclosures — cash and noncash
Interest paid		$	60,293			$	52,467
Income taxes paid			5,674				13,015
Loans converted to other real estate			29,676				3,199
Unrealized gain (loss) on available for sale securities, net of tax			111				(435	)

See notes to condensed consolidated financial statements.

GREEN BANKSHARES, INC.

NOTE 1 — PRINCIPLES OF CONSOLIDATION

The accompanying unaudited condensed consolidated financial statements of Green Bankshares, Inc. (the “Company”) and its wholly owned subsidiary, GreenBank (the “Bank”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Certain amounts from prior period financial statements have been reclassified to conform to the current year’s presentation.

NOTE 2 — LOANS

Loans at September 30, 2008 and December 31, 2007 were as follows:

		September 30,				December 31,
		2008				2007
Commercial real estate		$	1,525,742			$	1,549,457
Residential real estate			391,550				398,779
Commercial			319,087				320,264
Consumer			91,866				97,635
Other			9,237				3,871
Unearned income			(14,406	)			(13,630	)
Loans, net of unearned income		$	2,323,076			$	2,356,376
Allowance for loan losses		$	(34,856	)		$	(34,111	)

(Continued)

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
Unaudited
(Amounts in thousands, except share and per share data)

NOTE 2 — LOANS (Continued)

Transactions in the allowance for loan losses and certain information about nonaccrual loans and loans 90 days past due but still accruing interest for the nine months ended September 30, 2008 and twelve months ended December 31, 2007 were as follows:

		September 30,				December 31,
		2008				2007
Balance at beginning of year		$	34,111			$	22,302
Add (deduct):
Reserve of acquired bank			—				9,022
Provision for loan losses			20,527				14,483
Loans charged off			(22,380	)			(13,471	)
Recoveries of loans charged off			2,598				1,775
Ending balance		$	34,856			$	34,111

		September 30,				December 31,
		2008				2007
Impaired loans were as follows:
Loans with no allowance allocated		$	41,008			$	—
Loans with allowance allocated			16,458				36,267
Amount of allowance allocated			3,161				5,440
Nonperforming loans were as follows:
Loans past due 90 days still on accrual		$	54			$	18
Nonaccrual loans			40,687				32,060
Total		$	40,741			$	32,078

(Continued)

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
Unaudited
(Amounts in thousands, except share and per share data)

NOTE 3 — EARNINGS PER SHARE OF COMMON STOCK

Basic earnings per share (EPS) of common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock is computed by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period. Stock options and restricted common shares are regarded as potential common shares. Potential common shares are computed using the treasury stock method. For the three and nine months ended September 30, 2008, 371,205 options are excluded from the effect of dilutive securities because they are anti-dilutive; 44,910 options are similarly excluded from the effect of dilutive securities for the three and nine months ended September 30, 2007.

The following is a reconciliation of the numerators and denominators used in the basic and diluted earnings per share computations for the three and nine months ended September 30, 2008 and 2007:

		Three Months Ended September 30,
		2008								2007
		Income				Shares				Income				Shares
		(Numerator)				(Denominator)				(Numerator)				(Denominator)
Basic EPS
Income available to common shareholders		$	1,234				12,931,774			$	8,914				12,921,240
Effect of dilutive shares			—				15,844				—				87,493
Diluted EPS
Income available to common shareholders plus assumed conversions		$	1,234				12,947,618			$	8,914				13,008,733

		Nine Months Ended September 30,
		2008								2007
		Income				Shares				Income				Shares
		(Numerator)				(Denominator)				(Numerator)				(Denominator)
Basic EPS
Income available to common shareholders		$	9,874				12,931,538			$	21,616				11,362,422
Effect of dilutive shares			—				4,546				—				92,967
Diluted EPS
Income available to common shareholders plus assumed conversions		$	9,874				12,936,084			$	21,616				11,455,389

(Continued)

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
Unaudited
(Amounts in thousands, except share and per share data)

NOTE 4 — SEGMENT INFORMATION

The Company’s operating segments include banking, mortgage banking, consumer finance, automobile lending and title insurance. The reportable segments are determined by the products and services offered, and internal reporting. Loans, investments and service charges and fees on deposits provide the revenues in the banking operation; loans and fees provide the revenues in consumer finance and mortgage banking and insurance commissions provide revenues for the title insurance company. Consumer finance, automobile lending and title insurance do not meet the quantitative threshold on an individual basis, and are therefore shown below in “Other Segments”. Mortgage banking operations are included in “Bank”. All operations are domestic.

Segment performance is evaluated using net interest income and noninterest income. Income taxes are allocated based on income before income taxes, and indirect expenses (including 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
Three months ended September 30, 2008		Bank				Segments				Company				Eliminations				Totals
Net interest income (expense)		$	23,499			$	1,935			$	(1,050	)		$	—			$	24,384
Provision for loan losses			7,636				984				—				—				8,620
Noninterest income			7,711				485				32				(218	)			8,010
Noninterest expense			20,347				1,289				526				(218	)			21,944
Income tax expense (benefit)			1,002				57				(463	)			—				596
Segment profit (loss)		$	2,225			$	90			$	(1,081	)		$	—			$	1,234
Segment assets at September 30, 2008		$	2,963,181			$	39,106			$	9,754			$	—			$	3,012,041

						Other				Holding
Three months ended September 30, 2007		Bank				Segments				Company				Eliminations				Totals
Net interest income (expense)		$	27,454			$	1,710			$	(1,871	)		$	—			$	27,293
Provision for loan losses			961				483				—				—				1,444
Noninterest income			7,311				624				56				(303	)			7,688
Noninterest expense			17,836				1,239				238				(303	)			19,010
Income tax expense (benefit)			6,154				241				(782	)			—				5,613
Segment profit (loss)		$	9,814			$	371			$	(1,271	)		$	—			$	8,914
Segment assets at September 30, 2007		$	2,905,571			$	37,517			$	12,659			$	—			$	2,955,747

						Other				Holding
Nine months ended September 30, 2008		Bank				Segments				Company				Eliminations				Totals
Net interest income (expense)		$	71,647			$	5,743			$	(3,490	)		$	—			$	73,900
Provision for loan losses			18,552				1,975				—				—				20,527
Noninterest income			22,315				1,549				209				(645	)			23,428
Noninterest expense			56,906				3,838				1,546				(645	)			61,645
Income tax expense (benefit)			6,448				579				(1,745	)			—				5,282
Segment profit (loss)		$	12,056			$	900			$	(3,082	)		$	—			$	9,874

						Other				Holding
Nine months ended September 30, 2007		Bank				Segments				Company				Eliminations				Totals
Net interest income (expense)		$	66,988			$	4,916			$	(2,857	)		$	—			$	69,047
Provision for loan losses			2,480				1,197				—				—				3,677
Noninterest income			18,485				1,886				94				(895	)			19,570
Noninterest expense			46,198				3,751				707				(895	)			49,761
Income tax expense (benefit)			14,159				728				(1,324	)			—				13,563
Segment profit (loss)		$	22,636			$	1,126			$	(2,146	)		$	—			$	21,616

(Continued)

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
Unaudited
(Amounts in thousands, except share and per share data)

NOTE 4 — SEGMENT INFORMATION (Continued)

Asset Quality Ratios

As of and for the period ended September 30, 2008		Bank				Other				Total
Nonperforming loans as percentage of total loans, net of unearned income			1.74	%			1.57	%			1.75	%
Nonperforming assets as a percentage of total assets			1.73	%			1.69	%			1.76	%
Allowance for loan losses as a percentage of total loans, net of unearned income			1.37	%			8.01	%			1.50	%
Allowance for loan losses as a percentage of nonperforming loans			78.93	%			510.88	%			85.56	%
YTD net charge-offs to average total loans, net of unearned income			0.77	%			4.64	%			0.84	%

As of and for the period ended September 30, 2007		Bank				Other				Total
Nonperforming loans as percentage of total loans, net of unearned income			0.24	%			1.40	%			0.26	%
Nonperforming assets as a percentage of total assets			0.22	%			1.96	%			0.26	%
Allowance for loan losses as a percentage of total loans, net of unearned income			1.32	%			8.01	%			1.45	%
Allowance for loan losses as a percentage of nonperforming loans			556.73	%			573.30	%			558.18	%
YTD net charge-offs to average total loans, net of unearned income			0.02	%			2.45	%			0.07	%

As of and for the year ended December 31, 2007		Bank				Other				Total
Nonperforming loans as percentage of total loans, net of unearned income			1.35	%			1.30	%			1.36	%
Nonperforming assets as a percentage of total assets			1.22	%			2.11	%			1.25	%
Allowance for loan losses as a percentage of total loans, net of unearned income			1.32	%			7.96	%			1.45	%
Allowance for loan losses as a percentage of nonperforming loans			98.37	%			609.80	%			106.34	%
Net charge-offs to average total loans, net of unearned income			0.50	%			4.14	%			0.57	%

		Bank				Other				Total
Actual for the nine month period ended September 30, 2008		$	17,950			$	1,832			$	19,782
Actual for the nine month period ended September 30, 2007		$	423			$	875			$	1,298
Actual for the year ended December 31, 2007		$	10,193			$	1,503			$	11,696

(Continued)

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
Unaudited
(Amounts in thousands, except share and per share data)

NOTE 5 — BUSINESS COMBINATION

On May 18, 2007, the Company acquired Civitas BankGroup, Inc. (“CVBG”), parent of Cumberland Bank. CVBG, headquartered in Franklin, Tennessee, operated 12 full-service branches in the Middle Tennessee area. The primary reason for the acquisition of CVBG, and the premium paid, was to provide accelerated entry for the Company in the Middle Tennessee area in some of the fastest growing areas in the Nashville MSA. Operating results of CVBG are included in the consolidated financial statements since the date of the acquisition.

The acquisition was accounted for under the purchase method of accounting, and accordingly, the purchase price has been allocated to the tangible and identified intangible assets purchased and the liabilities assumed based upon estimated fair values at the date of acquisition. The aggregate purchase price was $164,268, including $45,793 paid in cash and 3,091,495 shares of the Company’s common stock. Identified intangible assets and purchase accounting fair value adjustments are being amortized under various methods over the expected lives of the corresponding assets and liabilities. Goodwill will not be amortized and is not deductible for tax purposes, but will be reviewed for impairment on an annual basis. Identified intangible assets from the acquisition subject to amortization were $9,485 and total goodwill from the acquisition was $112,062.

The following table summarizes the fair value of assets acquired and liabilities assumed at the date of acquisition:

Cash and due from banks		$	21,182
Securities			200,081
FHLB stock			2,863
Bankers Bank stock			100
Loans held for sale			8,642
Loans, net of unearned income			631,496
Allowance for loan losses			(9,022	)
Premises and equipment			18,332
Goodwill			112,062
Core deposit intangible			8,740
Mortgage servicing rights			745
Other assets			16,369
Total assets acquired			1,011,590
Deposits			(699,089	)
Federal funds purchased			(52,500	)
Repurchase agreements			(42,790	)
FHLB advances			(32,000	)
Subordinated debentures			(17,527	)
Other liabilities			(3,416	)
Total liabilities assumed			(847,322	)
Net assets acquired		$	164,268

The Company also incurred $761 in direct costs for legal, advisory and conversion cost that were capitalized into goodwill associated with the merger.

The following table presents pro forma information as if the acquisition had occurred at the beginning of 2007 for the nine month period ending September 30, 2007. The pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the acquisition, depreciation expense on property acquired, interest expense on deposits assumed, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the acquisition been effected on the assumed dates.

(Continued)

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
Unaudited
(Amounts in thousands, except share and per share data)

NOTE 5 — BUSINESS COMBINATION (Continued)

		Nine Months
		Ended
		September 30,
		2007
Net interest income		$	88,991
Net income		$	27,605
Basic earnings per share		$	2.08
Diluted earnings per share		$	2.06

NOTE 6 — BORROWINGS

In May 2007, the Company formed GreenBank Capital Trust I (“GB Trust I”), and GB Trust I issued $56,000 of variable rate trust preferred securities. The Company issued $57,732 of subordinated debentures to the GB Trust I in exchange for the proceeds of the sale of trust preferred securities, 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 (4.47% at September 30, 2008). The Company may redeem the subordinated debentures, in whole or in part, beginning June 2012 and in certain events prior to that date, at a premium. The subordinated debentures must be redeemed no later than 2037.

Also in May 2007 the Company acquired two Trusts in the CVBG acquisition, Civitas Statutory Trust I (“CS Trust I”) and Cumberland Capital Statutory Trust II (“CCS Trust II”).

In December 2005, CS Trust I issued $13,000 of variable rate trust preferred securities, and CVBG issued $13,403 of subordinated debentures to CS Trust I in exchange for the sale of trust preferred securities, 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 (4.36% at September 30, 2008). The Company may redeem the subordinated debentures, in whole or in part, beginning March 2011 and in certain events prior to that date, at a premium. 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, and CVBG issued $4,124 of subordinated debentures to CCS Trust II in exchange for the proceeds of the sale of trust preferred securities, 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 (6.38% at September 30, 2008). As of July 2007 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.

(Continued)

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
Unaudited
(Amounts in thousands, except share and per share data)

NOTE 7 — FAIR VALUE DISCLOSURES

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” and SFAS No. 159 “The Fair Value Option for Financial Assets and Liabilities”. SFAS No. 157, which was issued in September 2006, establishes a framework for using fair value. It defines fair value rules as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 159, which was issued in February 2007, generally permits the measurement of selected eligible financial instruments at fair value at specified election dates. Upon adoption of SFAS No. 159, the Company did not elect to adopt the fair value option for any financial instruments.

SFAS No. 157 defines fair value 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. SFAS No. 157 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.

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.

(Continued)

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
Unaudited
(Amounts in thousands, except share and per share data)

NOTE 7 — FAIR VALUE DISCLOSURES (Continued)

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.

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 SFAS No. 114, “Accounting by Creditors for Impairment of a Loan:” (SFAS 114). 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 September 30, 2008, substantially all of the total impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. In accordance with SFAS No. 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value 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 value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

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.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value:

		September 30, 2008
														Total Carrying
														Amount in
														Statement of				Assets/Liabilities
		Fair Value Measurement Using												Financial				Measured at Fair
Description		Level 1				Level 2				Level 3				Position				Value
Securities available for sale		$	—			$	292,897			$	—			$	292,897			$	292,897

(Continued)

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
Unaudited
(Amounts in thousands, except share and per share data)

NOTE 7 — FAIR VALUE DISCLOSURES (Continued)

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 U.S. generally accepted accounting principles. 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.

		September 30, 2008
														Total Carrying
														Amount in
														Statement of				Assets/Liabilities
		Fair Value Measurement Using												Financial				Measured at Fair
Description		Level 1				Level 2				Level 3				Position				Value
Loans		$	—			$	—			$	35,536			$	35,536			$	35,536

(Continued)

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

Green Bankshares, Inc. (the “Company”) is the bank holding company for GreenBank (the “Bank”), a Tennessee-chartered commercial bank that conducts the principal business of the Company. The Company is the third largest bank holding company headquartered in Tennessee based on asset size at September 30, 2008 and at that date was also the second largest NASDAQ — listed bank holding company headquartered in Tennessee. The Bank currently maintains a main office in Greeneville, Tennessee and 65 full-service bank branches primarily in East and Middle Tennessee. In addition to its commercial banking operations, the Bank conducts separate businesses through its three wholly-owned subsidiaries: Superior Financial Services, Inc. (“Superior Financial”), a consumer finance company; GCB Acceptance Corporation (“GCB Acceptance”), an automobile lending company; and Fairway Title Co., a title company formed in 1998. The Bank also operates a wealth management office in Sumner County, Tennessee, and a mortgage banking operation in Knox County, Tennessee. All dollar amounts reported or discussed in Part I, Item 2 of this Quarterly Report on Form 10-Q are shown in thousands, except share and per share amounts.

On October 3, 2008 the Emergency Economic Stabilization Act was enacted into law in order to address the economic crisis which has currently frozen the credit markets. This landmark bill authorizes the Secretary of the Treasury to purchase up to $700 billion in troubled assets from financial institutions in order to provide liquidity to the market and promote financial market stability. The troubled assets included in this program are residential and commercial mortgages, securities, obligations or other instruments related to such mortgages, and any other illiquid financial instruments determined by the Secretary to be necessary, such as car and truck loans. The bill includes a variety of taxpayer protections such as executive compensation limits, measures to prevent unjust enrichment, and a warrant provision for the government to retain an equity stake in financial institutions participating in the program. The bill also includes homeownership preservation provisions such as mortgage modification measures. In addition, the bill also includes an insurance program to guarantee troubled assets of financial institutions under the program, using risk-based premiums for such guarantees to cover anticipated claims.

Since October 3, 2008, there have been additional details surfacing almost daily concerning this legislation which may, or may not, impact the Company. The extent of these changes are currently being evaluated and the impact on the Company is unknown at this time. On October 14, 2008 Treasury announced the TARP Capital Purchase Program, pursuant to which Treasury will make direct capital investments in participating financial institutions in an attempt to stimulate credit flows in the economy. Under this revised program, healthy banks are encouraged to participate. The minimum investment for a financial institution considering participating in the Capital Purchase Program is an amount equal to 1% of its risk-weighted assets and the maximum amount is the lesser of $25 billion or 3% of its risk-weighted assets. The application to participate in this Capital Purchase Program must be received by the institution’s primary banking regulator no later than November 14, 2008 and the investment is expected to be made by December 31, 2008.

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the Company’s consolidated results of operations and financial condition. This discussion should be read in conjunction with the (i) condensed consolidated financial statements and notes thereto in this Form 10-Q and (ii) the audited, consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 10-K”). Except for specific historical information, many of the matters discussed in this Form 10-Q may express or imply projections of revenues or expenditures, plans and objectives for future operations, growth or initiatives, expected future economic performance, or the expected outcome or impact of pending or threatened litigation. These and similar statements regarding events or results which the Company expects will or may occur in the future, are forward-looking statements that involve risks, uncertainties and other factors which may cause actual results and performance of the Company to differ materially from those expressed or implied by those statements. All forward-looking information is provided pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these risks, uncertainties and other factors. Forward-looking statements, which are based on assumptions and estimates and describe our future plans, strategies and expectations, are generally identifiable by the use of forward-looking terminology and words 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 negative or other derivatives of each of these terms) or similar terminology and expressions.

Although the Company believes that the assumptions underlying any forward-looking statements are reasonable, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in or implied by the forward-looking statements. Factors and risks that may result in actual results differing from this forward-looking information include, but are not limited to, (1) unanticipated deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (2) lack of sustained growth in the economy in the markets that the Bank serves; (3) increased competition with other financial institutions in the markets that the Bank serves; (4) changes in the legislative and regulatory environment; (5) the Company’s failure to successfully implement its growth strategy; and (6) the loss of key personnel as well as those contained in the 2007 10-K in Part I, Item 1A thereof, which is incorporated herein by this reference, as well as other factors discussed throughout this document, including, without limitation the factors described under “Critical Accounting Policies and Estimates” on page 19 of this Quarterly Report on Form 10-Q, or from time to time, in the Company’s filings with the Securities and Exchange Commission (“SEC”), press releases and other communications.

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 Quarterly Report on Form 10-Q are expressly qualified in their entirety by the cautionary statements in this section and to the more detailed risk factors included in the Company’s 2007 10-K. 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 Quarterly Report on Form 10-Q, 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 SEC or in its other public disclosures.

Growth and Business Strategy

The Company expects that, over the next five years, its growth from mergers and acquisitions, including acquisitions of both entire financial institutions and selected branches of financial institutions, will continue. De novo branching is also expected to be a method of growth, particularly in high-growth and other demographically-desirable markets.

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

The Bank had historically operated under a single bank charter while conducting business under 18 bank brands. On January 23, 2007 the Bank announced that it was changing all brand names to GreenBank throughout all the communities it serves to better enhance recognition and customer convenience. The GreenBank name became effective on March 31, 2007. 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 on Saturday. During the first quarter of 2007, the Bank initiated Sunday banking hours from 1:00 pm to 4:00 pm at most branches. The Bank also offers free online banking and in early 2005 established its High Performance Checking Program which has generated a significant number of new core transaction accounts.

In addition to the Company’s business model, which is summarized in the paragraphs above, the Company is continuously investigating and analyzing other lines and areas of business. These include, but are not limited to, various types of insurance and real estate activities. 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.

Overview

The Company reported net income for the three and nine month periods ended September 30, 2008 of $1,234 and $9,874, respectively compared to net income of $8,914 and $21,616 for the corresponding 2007 periods. The decline in reported earnings for the periods presented was the result of deteriorating economic conditions during 2008 which impacted the Company’s residential real estate construction and development loan portfolios. As a result, the Company’s loan loss provision was $8,620 during the third quarter of 2008 and $20,527 for the nine month period ended September 30, 2008. Non-accrual loans remained relatively constant at $40,687 at September 30, 2008 compared with $40,419 at June 30, 2008 but have increased from $32,060 at December 31, 2007 due to continued downward pressure on residential real estate values. Other Real Estate Owned (“OREO”) decreased to $12,215 at September 30, 2008 from June 30 $20,632 at June 30, 2008 but has increased compared to $4,859 at December 31, 2007. The decrease in OREO from June 30, 2008 levels reflected the Company’s efforts to aggressively reduce non-performing assets through auction sales conducted throughout the third quarter of 2008.

As previously disclosed, late in the second quarter, the Company experienced the impact of further economic weaknesses in the Nashville and Knoxville markets concentrated primarily in the residential real estate construction and development segment of the loan portfolio. This segment of the portfolio totaled approximately $187 million at June 30, 2008 and represented almost eight percent of total loans outstanding at that date. During mid-June, certain customers acknowledged liquidity concerns and as a result approximately $12 million of loans were immediately placed on non-accrual. Additionally an intensified effort was undertaken to review this segment of the portfolio for potential impairment based upon projected future cash flows of the borrowers. As a result of this intensified effort, an additional $23 million of current loans were identified and placed on non-accrual during the second quarter. In July 2008 the Company announced that it would conduct auctions to dispose of certain existing OREO related assets as well as accelerating efforts to convert non-earning assets to earning assets. During the third quarter, OREO assets disposed of resulted in proceeds received of $10,706 and losses incurred on disposition of these assets of $1,942. At September 30, 2008, of the $40.6 million of loans on non-accrual, approximately $7.0 million were less than 30 days past due with $4.1 million of the $7.0 million current.

Net interest income totaled $24,384 during the third quarter of 2008 and declined approximately 3% from the second quarter of 2008 as a result net interest margin compression reflecting local deposit pricing competition pressure coupled with the income impact of carrying a higher average level of non-earning assets during the quarter. On a year-to-date basis, despite falling market interest rates, net interest income improved by 7% over the same period a year ago primarily as a result of a higher level of earning assets resulting from an acquisition completed in May 2007.

Non-interest income totaled $8,010 for the three months ended September 30, 2008, down slightly from the second quarter of 2008 due to further contraction in mortgage related activity coupled with reduced revenues from mutual fund and annuity sales activity. On a year-to-date basis, non-interest income was $23,428 at September 30, 2008, up 20% over the same period a year ago reflecting the acquisition completed in May 2007 and the continued success of the Company’s High Yield Checking Program.

Non-interest expenses were $21,944 for the third quarter of 2008, up $1,804 from the second quarter of the year, and included $2,598 of OREO related costs during the current quarter. Non-interest expense levels for the nine months of 2008 totaled $61,645, reflecting an increase of 24% over the same period a year ago. In addition to the impact of the incremental recurring operating costs of an acquisition completed in May 2007, the Company has incurred approximately $4,183 of incremental expenses related to OREO losses and collection efforts.

Net charge-offs for the quarter totaled $9,115 compared with net charge-offs of $9,595 during the second quarter of 2008 and net charge-offs of $676 during the third quarter of 2007. On a year to date basis, net charge-offs for 2008 have totaled $19,782 versus $1,298 during the same period last year. Non-performing assets were $52,956 at September 30, 2008 compared with $61,212 at June 30, 2008 and $36,937 at year end 2007. The primary reason for the decrease in non-performing assets from June 30, 2008 was the reduction of OREO through auctions. At September 30, 2008 the Company’s non-performing loans to total loans ratio was 1.75% compared with 1.73% at June 30, 2008 and 1.36% at December 31, 2007. Non-performing assets to total assets reflected a ratio of 1.76% at September 30, 2008 compared with 2.03% at June 30, 2008 and 1.25% at December 31, 2007. The Company’s loan loss reserve to loans was 1.50% at September 30, 2008 compared with 1.51% at June 30, 2008 and 1.45% at December 31, 2007.

At September 30, 2008, the Company’s assets totaled $3,012,041, deposits were $2,276,198, loans, net of unearned income, amounted to $2,323,076 and total shareholders’ equity was $326,482. The Company’s annualized return on average shareholders’ equity for the three and nine months ended September 30, 2008 was 1.49% and 3.99%, respectively, and its annualized return on average total assets was 0.16% and 0.45%, respectively.

Critical Accounting Policies and Estimates

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

Management continually evaluates the Company’s accounting policies and estimates it uses to prepare the consolidated financial statements. In general, management’s estimates are based on historical experience, information from regulators and third party professionals and various assumptions that are believed to be reasonable under the existing 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. Based on management’s calculation, an allowance of $34,856, or 1.50% of total loans, net of unearned income, was an adequate estimate of losses inherent in the loan portfolio as of September 30, 2008. This estimate resulted in a provision for loan losses in the income statement of $8,620 and $20,527, respectively, for the three and nine months ended September 30, 2008. If the economic conditions, loan mix and amount of future charge-offs differ significantly from those assumptions used by management in making its determination, the allowance for loan losses and provision for loan losses on the income statement could be materially affected.

The consolidated financial statements include certain accounting 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 purchase accounting adjustments resulting from acquisitions. 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 Income. Net income for the three months ended September 30, 2008 was $1,234, compared to $8,914 for the same period in 2007. This decrease of $7,680, or 86%, resulted primarily from a $7,176 increase in the provision for loan losses reflecting continued economic weaknesses in the residential real estate construction and development portfolios primarily in the Nashville and Knoxville markets during 2008. In addition, the Bank had a net loss on the sale of OREO of $1,942 that increased noninterest expense during the third quarter of 2008 related to the liquidation of OREO properties plus $657 of OREO/collection related costs.

Net interest income for the three months ended September 30, 2008 was $24,384, as compared to $27,293 for the same period in 2007. This decrease of $2,909 in net interest income resulted primarily from the contraction of the net interest margin plus the income impact of carrying a higher level of non-performing assets. During this period the net interest margin declined by 50 basis points to 3.72% at September 30, 2008 from 4.22% at September 30, 2007 reflecting the downward movement in market interest rates resulting from initiatives undertaken by the Federal Open Market Committee (“FOMC”) to reduce market interest rates. Non-interest income rose 4% from the third quarter of 2007 and totaled $8,010 for the three months ended September 30, 2008. The principal driver of this increase was the ongoing success of the Company’s High Performance Checking product. During the third quarter of 2008, the Company opened 3,564 net new checking accounts compared with 3,465 opened during the same period a year ago. Non-interest expenses increased $2,934, or 15%, to $21,944 from $19,010 for the three months ended September 30, 2008 and 2007, respectively. This change is primarily attributable to the previously mentioned net loss on sale of OREO of $1,977 and collection-related cost of $657.

Net income for the nine months ended September 30, 2008 was $9,874 compared to $21,616 for the same period in 2007. The decrease of $11,742 is principally a function of increased provision for loan losses incurred in 2008 versus 2007 and the increased recurring operating costs associated with an acquisition completed in May 2007.

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 expense on deposits and other interest-bearing liabilities. The primary factors which affect net interest income are changes in volume and rates on interest-earning assets and interest-bearing liabilities, which are affected in part by management’s responses to changes in interest rates through asset/liability management. During the three months ended September 30, 2008, net interest income was $24,384, as compared to $27,293 for the same period in 2007, representing a decrease of 11%. This decrease of $2,909 in net interest income resulted primarily from the contraction of the net interest margin plus the income impact of carrying a higher level of non-performing assets.

The Company’s average balance for interest-earning assets increased 2% from $2,584,814 for the three months ended September 30, 2007 to $2,625,820 for the three months ended September 30, 2008.

The Company’s average balance for interest-bearing liabilities increased 4% from $2,345,587 for the three months ended September 30, 2007 to $2,450,824 for the three months ended September 30, 2008. The Company experienced a 13% increase in average interest-bearing deposits from $1,822,380 for the three months ended September 30, 2007 to $2,057,849 for the three months ended September 30, 2008.

The Company’s yield on loans (the largest component of interest-earning assets) decreased by 164 basis points from the third quarter of 2007 to the third quarter of 2008. Approximately one-half of the Company’s loan portfolio is set at variable rates and was impacted by the result of the FOMC’s action to lower market interest rates by 275 basis points during this period of time.

		Beginning				Increase/				Ending
FOMC Meeting Date		Rate				Decrease				Rate
March 21, 2007			5.25	%			0.00	%			5.25	%
May 9, 2007			5.25	%			0.00	%			5.25	%
June 28, 2007			5.25	%			0.00	%			5.25	%
August 7, 2007			5.25	%			0.00	%			5.25	%
September 18, 2007			5.25	%			(0.50	%)			4.75	%
October 31, 2007			4.75	%			(0.25	%)			4.50	%
December 11, 2007			4.50	%			(0.25	%)			4.25	%
January 22, 2008			4.25	%			(0.75	%)			3.50	%
January 30, 2008			3.50	%			(0.50	%)			3.00	%
March 18, 2008			3.00	%			(0.75	%)			2.25	%
April 30, 2008			2.25	%			(0.25	%)			2.00	%
June 25, 2008			2.00	%			0.00	%			2.00	%
August 6, 2008			2.00	%			0.00	%			2.00	%
September 16, 2008			2.00	%			0.00	%			2.00	%

The Company’s cost of interest-bearing liabilities decreased by 128 basis points from the third quarter ended September 30, 2007 to the third quarter ended September 30, 2008. The velocity of change on fixed maturity interest-bearing liabilities is slower than the immediate change on variable rate assets. The re-pricing characteristics of this portion of interest-bearing liabilities which comprise 71% of total interest-bearing liabilities will lag behind market interest rate changes especially in a rapidly changing interest rate environment.

For the nine months ended September 30, 2008, net interest income increased by $4,853, or 7%, to $73,900 from $69,047 for the same period in 2007, despite the dramatic drop in market interest rates of 325 basis points, reflecting the impact of the acquisition completed during May 2007.

The following table sets forth certain information relating to the Company’s consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. These yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented.

		Three Months Ended
		September 30,
		2008												2007
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
Interest-earning assets:
Loans(1) (2)		$	2,302,465			$	38,510				6.65	%		$	2,327,498			$	48,652				8.29	%
Investment securities (2)			306,616				4,154				5.39	%			255,556				3,825				5.94	%
Other short-term investments			16,739				87				2.07	%			1,760				22				4.96	%
Total interest-earning assets		$	2,625,820			$	42,751				6.48	%		$	2,584,814			$	52,499				8.06	%
Noninterest earning assets			373,449												321,831
Total assets		$	2,999,269											$	2,906,645
Interest-bearing liabilities:
Deposits:
Interest checking, savings and money market		$	617,156			$	2,146				1.38	%		$	701,472			$	4,381				2.48	%
Time deposits			1,440,693				12,199				3.37	%			1,120,908				13,431				4.75	%
Total interest-bearing deposits		$	2,057,849			$	14,345				2.77	%		$	1,822,380			$	17,812				3.88	%
Securities sold under repurchase agreements and short-term borrowings			74,385				262				1.40	%			147,589				1,777				4.78	%
Notes payable			229,928				2,525				4.37	%			286,956				3,541				4.90	%
Subordinated debentures (3)			88,662				1,050				4.71	%			88,662				1,871				8.37	%
Total interest-bearing liabilities		$	2,450,824			$	18,182				2.95	%		$	2,345,587			$	25,001				4.23	%
Noninterest bearing liabilities:
Demand deposits			193,566												208,093
Other liabilities			24,698												33,893
Total noninterest bearing liabilities			218,264												241,986
Total liabilities			2,669,088												2,587,573
Shareholders’ equity			330,181												319,072
Total liabilities and shareholders’ Equity		$	2,999,269											$	2,906,645
Net interest income						$	24,569											$	27,498
Interest rate spread											3.53	%											3.83	%
Net yield on interest-earning assets											3.72	%											4.22	%