United
      States


Securities
      and Exchange Commission


Washington,
      D.C. 20549





FORM
      10-KSB/A


Amendment
      No. 1





xAnnual
      Report Pursuant
      To Section 13 or 15(d) of The Securities Exchange Act of 1934




For
      the
      Fiscal Year ended December 31, 2006





o Transition
      Report
      Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of
      1934




For
      the
      Transition Period
      From _________   To___________




Commission
      File Number 000-49863





Tennessee
      Valley Financial Holdings, Inc.


(Exact
      name of small business issue as specified in charter)





Tennessee                                                                                                                                                  
45-0471419


(State or other jurisdiction of incorporation or
      organization)                                                                          
(I.R.S. Employer Identification No.)





401
      South Illinois Avenue Oak Ridge,
      TN                                                                    
                                                     
37830


(Address of Principal Executive
      Offices)                                                                                                                  
(Zip Code)





Registrant’s
      telephone number, including area code:


865-483-9444





Securities
      registered pursuant to Section 12(g) of the Act: Common Stock (par value $1.00
      per share)




The
      registrant (1) has filed all reports required to be filed by Section 13 or
      15(d)
      of the Exchange Act during the past 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.





Disclosures
      of delinquent filers in response to items 405 of Regulation S-B is not contained
      in this form, and no disclosure will be contained, to the best of the
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. [  ] Yes [X] No





The
      registrant’s revenues for the most recent fiscal year were
      $12,488,000.





At
      March
      17, 2007 the aggregate market value of the voting stock held by non-affiliates
      of the registrant was approximately $8,657,844.





As
      of
      March 18, 2007 registrant had 1,509,571 shares of its $1.00 par value common
      stock outstanding.





Documents
      Incorporated by Reference: Proxy Statement related to
      2007
      Annual Meeting of Shareholders.












EXPLANATORY
        NOTE
 
 This
        Amendment No. 1 on Form 10-KSB/A to the Company’s Annual Report on Form 10-KSB
        for the year ended December 31, 2006, initially filed with the Securities
        and
        Exchange Commission on April 2, 2007, includes the fiscal year 2005 audit
        opinion of the predecessor auditor which was inadvertently omitted and is
        included herein on page 26. In addition, a typo was corrected in the
        supplemental cash flow information on page 32 relating to the acquisition
        of
        foreclosed real estate. We are filing this Form 10-KSB/A to correct these
        oversights.
 
 Except
        as
        described above, no other changes have been made to the original Form 10-KSB.
        Except for the changes stated above, this Form 10-KSB/A does not reflect
        events
        occurring after the filing of the Form 10-KSB or modify or update those
        disclosures, including any exhibits to the Form 10-KSB affected by subsequent
        events. Accordingly, this Form 10-KSB/A should be read in conjunction with
        our
        filings with the Securities and Exchange Commission made subsequent to the
        filing of the original Form 10-KSB, including any amendments to those
        filings.





Table
      of Contents








Part
              I:Item
              1:
            Description
              of
              Business     .........................................................................................................................................................................................................
            1Item
              2:
            Description
              of Property     
              .........................................................................................................................................................................................................
            10Item
              3:
            Legal
              Proceedings    
              ...................................................................................................................................................................................................................
            10Item
              4:
            Submission
              of Matters to a Vote of Security
              Holders    
              .......................................................................................................................................................
            10Part
              II:Item
              5:
            Market
              for Common Stock and Related
              Stockholder Matters    
              .........................................................................................................................................
            11Item
              6:
            Management’s
              Discussion and Analysis or Plan of Operation    
              ......................................................................................................................................
            12Item
              7:
            Financial
              Statements    
              ..............................................................................................................................................................................................................
            24Item
              8:
            Changes
              in and Disagreements with Accountants
              onAccounting
              and Financial Disclosure    
              .................................................................................
            53Item
              8A:
            Controls
              and Procedures    
              ......................................................................................................................................................................................................
            53Part
              III:Item
              9:
            Directors,
              Executive Officers, Promoters
              and Control Persons;Compliance
              with Section 16(a) of theExchange
              Act    
              ...........................................
            53Item
              10:
            Executive
              Compensation    
              .......................................................................................................................................................................................................
            53Item
              11:
            Security
              Ownership of Certain Beneficial
              Owners and Management
              and Related StockholderMatters    
              .................................................................
            53Item
              12:
            Certain
              Relationships and Related Transactions    
              ..............................................................................................................................................................
            53Item
              13:
            Exhibits    
              ....................................................................................................................................................................................................................................
            54Item
              14:
            Principal
              Accountant Fees and Services   
              .............................................................................................................................................................................
            54Signatures
            .........................................................................................................................................................................................................................................................
            55


















PART
      I








ITEM
      1.                      
DESCRIPTION OF BUSINESS





General





Tennessee
      Valley Financial Holdings,
      Inc. is a Tennessee business corporation formed for the purpose of acquiring
      TNBank, a Tennessee banking corporation, which we refer to as the “Bank,” by
      means of a share exchange thereby becoming a registered bank holding company
      under the Federal Reserve Act. On April 30, 2002, the shareholders of the Bank
      approved a plan of share exchange under which they exchanged their shares of
      the
      Bank, on a one for one basis, for our common shares. The exchange became
      effective on May 9, 2002. Our only activity is owning the Bank.





The
      Bank commenced operations as a
      state chartered bank on May 30, 1995. The Bank’s deposit accounts are insured
      under the Federal Deposit Insurance Act, up to the maximum applicable limits
      thereof. The Bank is not currently a member of the Federal Reserve System.
      The
      Bank has its main office and four branch locations, one in Oak Ridge, two
      located in Knoxville and one located in Maryville.





Our
      customer base consists of small to
      medium sized businesses in industries like retail, manufacturing, distribution,
      and residential real estate construction as well as professionals like doctors,
      lawyers and accountants. We also serve consumers with our various banking
      services and products, such as residential real estate mortgages. Our lending
      activities consist mainly of residential real estate loans, commercial loans
      and
      loans to consumers. The majority of our loans are collateralized by real estate.
      Additionally, we will secure loans with automobiles, commercial equipment,
      inventory, accounts receivable and other types of collateral. We will also
      make
      unsecured loans, but typically only on a limited basis. To mitigate the inherent
      risk involved in lending activities, we employ a risk management program aimed
      at identifying, recognizing and reducing these risks where
      possible.





We
      offer long term, fixed rate mortgage
      loans to our customers. Through relationships we have with secondary market
      investors, we originate mortgage loans and subsequently sell them to secondary
      market investors for which we receive fee income. We do not retain any servicing
      rights on these loans sold.





We
      offer a wide variety of
      competitive retail and commercial banking services. We offer deposit services
      including various types of checking, savings, money market, certificate of
      deposit and individual retirement accounts. Our lending services include
      consumer installment loans, various types of mortgage loans, personal lines
      of
      credit, home equity loans and lines of credit, credit cards, real estate
      construction and various types of customized commercial loans to small and
      medium sized businesses and professionals. We also offer safe deposit box and
      drive-thru services at the Oak Ridge and Knoxville locations. Automated teller
      machine (ATM) services are offered at Oak Ridge, Knoxville, and Maryville
      locations. We provide VISA and MasterCard credit cards and are a merchant
      depository for credit card drafts under both types of credit cards. We also
      offer banking services for our customers on the internet at our World Wide
      Web
      address, www.tnbank.net.
      Customers enrolled in the internet banking product can check balances and
      activity for their deposit and loan accounts, transfer funds between accounts,
      pay bills electronically, and access other typical internet banking services.
      We
      have trust powers but do not have a trust department presently. We offer
      retail investment services through a broker/dealer relationship with
      Linsco/Private Ledger Corporation. These services include brokerage transactions
      in common stocks, mutual funds and bonds, as well as financial planning
      services.





The
      Bank is subject to the regulatory
      authority of the Tennessee Department of Financial Institutions , which we
      refer
      to as  the “TDFI” and the Federal Deposit Insurance Corporation, which
      we refer to as the “FDIC.”





The
      Company’s principal executive
      offices are located at the Bank, at 401 S. Illinois Avenue, Oak Ridge,
      Tennessee, 37830, and its phone number is (865) 483-9444.





1


Market
      Area








Our
      primary service area encompassing
      Anderson, Roane, Knox and Blount Counties, includes the cities of Oak Ridge
      in
      Anderson and Roane Counties, Clinton in Anderson County and Knoxville and
      Farragut in Knox County , and Maryville and Alcoa in Blount County. Oak Ridge
      has long been known for its intellectual resources and strong educational
      system. The city has been long recognized as a research center, in a large
      part
      due to the Oak Ridge National Laboratory and the United States Department of
      Energy facilities that began during the Manhattan Project. Oak Ridge’s
      population has remained at around 28,000 people for several years. Much of
      the
      Oak Ridge economy is related to the federal facilities located here associated
      with the United States Department of Energy. This makes the Oak Ridge economy
      somewhat more reliant upon federal budget appropriations, political decisions
      and international events than typical economic factors. During the early 1990’s,
      these facilities saw reductions in their workforce but recently have had
      steadier levels of employment.





Employees





At
      December 31, 2006 we had 61
      full-time employees and four part-time employees. Our employees are not
      represented by any union or other collective bargaining agreement and we believe
      our employee relations are satisfactory.





Loan
      Activities





General.
      Our primary business emphasis is on making commercial business, commercial
      real
      estate and consumer loans. As of December 31, 2006, the net loan portfolio
      totaled $141.3 million, or 78% of total assets.





Loan
      Underwriting. Loan activities are subject to underwriting standards and
      loan origination procedures prescribed by the board of directors and management.
      We obtain loan applications to determine the borrower's ability to repay, and
      we
      verify the more significant items on these applications through the use of
      credit reports, financial statements and confirmations. Our loan policy for
      real
      estate loans generally requires that collateral be appraised by an independent,
      outside appraiser approved by the board of directors.





Loans
      are approved at various
      management levels up to and including the board of directors, depending on
      the
      amount of the loan. Loan approvals are made in accordance with delegated
      authority approved by the board of directors. Generally, loans less than
      $200,000 are approved by certain authorized officers. The President has
      individual loan authority up to $200,000. Generally, loans over $200,000 require
      approval by a committee of the board of directors.





General
      Loan
      Policies. For real estate loans, our policy is to have a valid mortgage
      lien on real estate securing a loan and to obtain a title insurance policy
      on
      loans in excess of $100,000, which insures the validity and priority of the
      lien. Borrowers must also obtain hazard insurance policies prior to closing,
      and
      when the property is in a flood prone area, we require flood insurance. Some
      real estate loans also require the borrower to advance funds on a monthly basis,
      together with each payment of principal and interest, to a mortgage escrow
      account from which we make disbursements for items like real estate taxes and
      property insurance.





We
      are permitted to lend up to 90% of
      the appraised value of the real property securing a mortgage loan. The
      loan-to-value ratio on a home secured by a junior lien generally does not exceed
      80% of the collateral, including the amount of the first mortgage. With respect
      to home loans granted for construction or combination construction/permanent
      financing, we will lend up to 80% of the appraised value of the property on
      an
“as completed” basis. The loan-to-value ratio on multi-family residential and
      commercial real estate loans is generally limited to 80% of value. Consumer
      loans are considered to be loans to natural persons for personal, family or
      household purposes, and these loans may be unsecured or secured by real or
      personal property.





The
      maximum amount which we could have
      loaned directly to any one borrower as of December 31, 2006, was approximately
      $4.0 million. Our largest loan relationship is $2.9 million consisting of
      several loans secured by commercial real estate and residential real estate,
      which were made prior to December 31, 2006.









2


Interest
      rates charged on loans are
      affected principally by competitive factors, the demand for loans and the supply
      of funds available for lending purposes. These factors are, in turn, affected
      by
      general economic conditions, monetary policies of the federal government,
      including the Federal Reserve Board, legislative tax policies and government
      budgetary matters.





Residential
      Real
      Estate Loans. We currently originate fixed-rate residential mortgage
      loans and adjustable rate mortgage loans for terms of up to 30 years. As of
      December 31, 2006, $41.4 million or 29% of the total loan portfolio consisted
      of
      one-to-four family residential real estate loans. As of this date, approximately
      $29.7 million, or 72.3% of these loans were adjustable rate mortgage
      loans.





Consumer
      Loans. We make various types of consumer loans, including automobile and
      boat loans, but primarily home equity loans. We originate consumer loans to
      provide a range of financial services to customers and create stronger ties
      to
      our customers. In addition, the shorter term and normally higher interest rates
      on these loans help maintain a profitable spread between our average loan yield
      and our cost of funds. The terms of consumer loans generally range from one
      to
      five years. Underwriting standards for consumer loans include an assessment
      of
      the applicant's repayment history on other debts and ability to meet existing
      obligations and payments on the proposed loans. Although the applicant's
      creditworthiness is a primary consideration, the underwriting process also
      includes a comparison of the value of the security, if any, to the proposed
      loan
      amount. Consumer loans generally involve more credit risks than mortgage loans
      because of the type and nature of the collateral or absence of collateral.
      Consumer loan repayments are dependent on the borrower's continuing financial
      stability, and are likely to be adversely affected by job loss, divorce and
      illness. Furthermore, the application of various federal and state laws,
      including federal and state bankruptcy and insolvency laws, may limit the amount
      which can be recovered on such loans. In most cases, any repossessed collateral
      will not provide an adequate source of repayment of the outstanding loan
      balance. As of December 31, 2006, consumer loans amounted to $25.9 million
      or
      18% of the total loan portfolio.





Commercial
      Business Loans. Commercial loans are business loans that are not secured
      by real estate and are dependent on business cash flows for repayment. At
      December 31, 2006, the largest commercial relationship was $651,000 secured
      by
      inventory and equipment. As of December 31, 2006, we had $23.3 million in
      commercial loans or 16% of the total loan portfolio.





Commercial
      Real
      Estate Loans. Commercial real estate loans are secured primarily by
      office, medical and retail business properties located in Anderson, Knox, Roane,
      and Blount Counties. These types of loans amounted to $15.7 million or 11%
      of
      the total loan portfolio as of December 31, 2006. Commercial real estate loans
      may be amortized for up to 25 years, but frequently mature in three to six
      years. We generally do not offer fixed-rate commercial real estate or
      multi-family real estate loans.





Income
      from Loan
      Activities. We earn fees in connection with loan commitments and
      originations, loan modifications, late payments, changes of property ownership
      and for miscellaneous services related to loans. Income from these activities
      varies from period to period with the volume and type of loans originated,
      sold
      and purchased, which in turn is dependent upon prevailing interest rates and
      their effect on the demand for loans in our primary service area.





We
      typically charge loan fees at the
      time of loan origination which may be a flat fee or a percentage of the amount
      of the loan. Under current accounting standards, the total amount of fees for
      long term mortgage loans we retain cannot typically be recognized as income
      immediately; rather, we defer a portion of the fees and take these fees into
      income over the contractual life of the loan, using a level yield method. If
      loans are prepaid or refinanced, we take all remaining deferred fees into income
      at that time.





Nonperforming
      Loans and Real Estate Owned. When a borrower fails to make a required
      payment on a loan, our loan officers and collection department attempt to
      collect the payment by contacting the borrower. If a payment on a loan has
      not
      been received by the end of a grace period (usually 10 days from the payment
      due
      date), notices are sent at that time, with follow-up contacts made thereafter.
      In most cases, delinquencies are cured promptly. If the delinquency exceeds
      29
      days and is not cured through normal collection procedures, more formal measures
      are instituted to remedy the default. We will then attempt to negotiate with
      the
      delinquent borrower to establish a satisfactory payment schedule. We take steps
      ranging from working out a reasonable payment agreement to
      foreclosure.


3


We
      generally place a loan on nonaccrual
      status and cease accruing interest when we deem loan payment performance is
      unsatisfactory. We place all loans past due 90 days, however, on nonaccrual
      status, unless the loan is both well collateralized and in the process of
      collection. Cash payments received while a loan is classified as nonaccrual
      are
      recorded as a reduction of principal as long as doubt exists as to
      collection.





If
      foreclosure is required, when
      completed, the property is sold at a public auction in which we will generally
      participate as a bidder. If we are the successful bidder, we then include the
      acquired real estate property in the other real estate owned “OREO” account
      until we sell the property. We are permitted under federal regulations to
      finance sales of real estate owned by “loans to facilitate,” which may involve
      more favorable interest rates and terms than generally would be granted under
      normal underwriting guidelines.





Competition





We
      compete with five commercial banks
      and four credit unions in our primary market area of Oak Ridge. In addition
      to
      these local competitors, banks from other market areas also compete with us.
      In
      addition to traditional providers (i.e. banks, credit unions, thrifts), other
      financial services companies like insurance companies, brokerages and finance
      companies compete with us. We anticipate that competition from providers of
      financial services over the World Wide Web will intensify in the future. One
      of
      the results of increasing competition is the lowering of our net interest
      margin, as consumers have more choices for deposits (thus increasing the cost)
      and loans (lowering the income). We attempt to mitigate these factors by
      emphasizing our service and relationship style of banking services.





We
      contemplate that we may seek to
      enter businesses closely related to banking or to acquire existing businesses
      already engaged in these activities. Some of the activities that the Federal
      Reserve has determined by regulation to be so closely related to the business
      of
      banking include making or servicing loans and certain types of leases, engaging
      in certain insurance and discount brokerage activities, performing certain
      data
      processing services, acting in certain circumstances as a fiduciary or
      investment or financial advisor, owning savings associations and making
      investments in certain corporations for project designed primarily to promote
      community welfare. Any acquisition by us will require prior approval of the
      Federal Reserve Board and, in some instances, other regulatory agencies. In
      addition, we will be competing with other bank holding companies, many of which
      have far greater assets and financial resources than we and whose common stock
      may be more widely traded than ours in attempting to acquire other permissible
      entities, and engaging in activities closely related to banking. Currently
      there
      are no definitive agreements for the acquisition of any entities and we cannot
      assure you that we will acquire any entity in the future.





Supervision
      and Regulation





Bank
      Holding
      Company Regulation. The Company is a bank holding company within the
      meaning of the Bank Holding Company Act of 1956, as amended (the “Holding
      Company Act”), and is registered with the Federal Reserve Board. Its banking
      subsidiary, the Bank, is subject to restrictions under federal law which limit the
      transfer of funds by it to the Company and nonbanking subsidiaries, whether
      in
      the form of loans, extensions of credit, investments, or asset purchases. Such
      transfers by any subsidiary bank to its holding company or any non-banking
      subsidiary are limited in amount to 10% of the subsidiary bank’s capital and
      surplus and, with respect to the Company and all such nonbanking subsidiaries,
      to an aggregate of 20% of such bank’s capital and surplus. Furthermore, such
      loans and extensions of credit are required to be secured in specified amounts.
      The Holding Company Act also prohibits, subject to certain exceptions, a bank
      holding company from engaging in or acquiring direct or indirect control of
      more
      than 5% of the voting stock of any company engaged in non banking activities.
      An
      exception to this prohibition is for activities expressly found by the Federal
      Reserve Board to be so closely related to banking or managing or controlling
      banks as to be a proper incident thereto or financial in nature.





As
      a bank holding company, the Company
      is required to file with the Federal Reserve Board semi-annual reports and
      such
      additional information as the Federal Reserve Board may require. The Federal
      Reserve Board also makes examinations of the Company.





4





According to Federal Reserve Board policy, bank holding companies are expected
      to act as a source of financial strength to each subsidiary bank and to commit
      resources to support each such subsidiary. This support may be required at
      times
      when a bank holding company may not be able to provide such
      support.





A
      bank holding company and its
      subsidiaries are also prohibited from acquiring any voting shares of, or
      interest in, any banks located outside of the state in which the operations
      of
      the bank holding company’s subsidiaries are located, unless the acquisition is
      specifically authorized by the statutes of the state in which the target is
      located. Further, a bank holding company and its subsidiaries are prohibited
      from engaging in certain tie-in arrangements in connection with the extension
      of
      credit or provision of any property or service. Thus, an affiliate of a bank
      holding company may not extend credit, lease or sell property, or furnish any
      services or fix or vary the consideration for these on the condition that (i)
      the customer must obtain or provide some additional credit, property or services
      from or to its bank holding company or subsidiaries thereof or (ii) the customer
      may not obtain some other credit, property, or services from a competitor,
      except to the extent reasonable conditions are imposed to assure the soundness
      of the credit extended.





In
      approving acquisitions by bank
      holding companies of banks and companies engaged in the banking-related
      activities described above, the Federal Reserve Board considers a number of
      factors, including the expected benefits to the public such as greater
      convenience, increased competition, or gains in efficiency, as weighed against
      the risks of possible adverse effects such as undue concentration of resources,
      decreased or unfair competition, onflicts of interest, or unsound banking
      practices. The Federal Reserve Board is also empowered to differentiate between
      new activities and activities commenced through the acquisition of a going
      concern.





The
      Attorney General of the United
      States may, within 30 days after approval by the Federal Reserve Board of an
      acquisition, bring an action challenging such acquisition under the federal
      antitrust laws, in which case the effectiveness of such approval is stayed
      pending a final ruling by the courts. Failure of the Attorney General to
      challenge an acquisition does not, however, exempt the holding company from
      complying with both state and federal antitrust laws after the acquisition
      is
      consummated or immunize the acquisition from future challenge under the
      anti-monopolization provisions of the Sherman Act.





Sarbanes-Oxley
      Act of 2002. On July 30, 2002, President Bush signed into law the
      Sarbanes-Oxley Act of 2002. This legislation represents a comprehensive revision
      of laws affecting corporate governance, accounting obligations and corporate
      reporting. The Sarbanes-Oxley Act is applicable to all companies with equity
      securities registered, or that file reports under, the Securities Exchange
      Act
      of 1934. In particular, the Sarbanes-Oxley Act establishes (i) new requirements
      for audit committees, including independence, expertise and responsibilities;
      (ii) additional responsibilities regarding financial statements for the chief
      executive officer and chief financial officer of the reporting company and
      new
      requirements for them to certify the accuracy of periodic reports; (iii) new
      standards for auditors and regulation of audits; (iv) increased disclosure
      and
      reporting obligations for the reporting company and its directors and executive
      officers, including an accelerated time frame for reporting of insider
      transactions; and (v) new and increased civil and criminal penalties for
      violations of the federal securities laws. The legislation also established
      a
      new accounting oversight board to enforce auditing standards and restrict the
      scope of services that accounting firms may provide to their public company
      audit clients. Because the Company’s common stock is registered with the SEC, it
      is subject to the requirements of this legislation.





Tennessee
      Banking
      Act; Federal Deposit Insurance Act. The Bank is a Tennessee
      state-chartered bank and is subject to the regulations of and supervision by
      the
      FDIC as well as the TDFI, Tennessee’s state banking authority. The Bank is also
      subject to various requirements and restrictions under federal and state law,
      including requirements to maintain reserves against deposits, restrictions
      on
      the types and amounts of loans that may be granted and the interest that may
      be
      charged thereon and limitations on the types of investments that may be made
      and
      the types of services that may be offered. Various consumer laws and regulations
      also affect the operations of the Bank. In addition to the impact of regulation,
      commercial banks are affected significantly by the actions of the Federal
      Reserve Board as it attempts to control the money supply and credit availability
      in order to influence the economy.





5





From time to time, legislation is enacted which has the effect of increasing
      the
      cost of doing business, limiting or expanding permissible activities or
      affecting the competitive balance between banks and other financial
      institutions. Proposals to change the laws and regulations governing the
      operations and taxation of banks, bank holding companies and other financial
      institutions are frequently made in Congress, in the Tennessee legislature
      and
      before various bank regulatory and other professional agencies. The likelihood
      of any major legislative changes and the impact such changes might have on
      the
      Bank are impossible to predict.





The
      Bank, as a Tennessee state
      chartered bank, is subject to primary supervision, periodic examination and
      regulation by the Commissioner of the TDFI (“Commissioner”) and the FDIC. If, as
      a result of an examination of a bank, the FDIC should determine that the
      financial condition, capital resources, asset quality, earnings prospects,
      management, liquidity or other aspects of the Bank’s operations are
      unsatisfactory or that the Bank or its management is violating or has violated
      any law or regulation, various remedies are available to the FDIC. Such remedies
      include the power to enjoin “unsafe or unsound” practices, to require
      affirmative action to correct any conditions resulting from any violation or
      practice, to issue an administrative order that can be judicially enforced,
      to
      direct an increase in capital, to restrict the growth of the Bank, to assess
      civil monetary penalties, to remove officers and directors and ultimately to
      terminate the Bank’s deposit insurance. The Commissioner has many of the same
      remedial powers, including the power to take possession of a bank whose capital
      becomes impaired. As of April 2, 2007, the Bank is not the subject of any such
      action by the FDIC or the Commissioner.





The
      deposits of the Bank are
      insured by the FDIC in the manner and to the extent provided by law. For this
      protection, the Bank pays a semiannual statutory assessment. Although the Bank
      is not a member of the Federal Reserve System, it is nevertheless subject to
      certain regulations of the Federal Reserve Board.





Various
      requirements and restrictions
      under the laws of the State of Tennessee and the United States affect the
      operations of the Bank. State and federal statutes and regulations relate to
      many aspects of the Bank’s operations, including reserves against deposits,
      interest rates payable on deposits, loans, investments, mergers and
      acquisitions, borrowings, dividends, locations of branch offices and capital
      requirements. Further, the Bank is required to maintain certain levels of
      capital.





Tennessee
      law contains limitations on
      the interest rates that may be charged on various types of loans and
      restrictions on the nature and amount of loans that may be granted and on the
      types of investments which may be made. The operations of banks are also
      affected by various consumer laws and regulations, including those relating
      to
      equal credit opportunity and regulation of consumer lending practices. All
      Tennessee banks must become and remain insured banks under the FDIA. (See 12
      U.S.C. §1811, et seq.).





FIRREA.
      Congress enacted the Financial Institutions Reform, Recovery and Enforcement
      Act
      of 1989 (“FIRREA”) on August 9, 1989. FIRREA provides that a depository
      institution insured by the FDIC can be held liable for any loss incurred by,
      or
      reasonable expected to be incurred by, the FDIC in connection with (i) the
      default of a commonly controlled FDIC insured depository institution or (ii)
      any
      assistance provided by the FDIC to a commonly controlled FDIC insured depository
      institution in danger of default. FIRREA provides that certain types of persons
      affiliated with financial institutions can be fined by the federal regulatory
      agency having jurisdiction over a depository institution with federal deposit
      insurance (such as the Bank) up to $1 million per day for each violation of
      certain regulations related (primarily) to lending to and transactions with
      executive officers, directors, principal shareholders and the interests of
      these
      individuals. Other violations may result in civil money penalties of $5,000
      to
      $30,000 per day or in criminal fines and penalties. In addition, the FDIC has
      been granted enhanced authority to withdraw or to suspend deposit insurance
      in
      certain cases.





FDICIA.
      The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
      which was enacted on December 19, 1991, substantially revised the depository
      institution regulatory and funding provisions of the FDIA and made revisions
      to
      several other federal banking statutes. Among other things, FDICIA requires
      the
      federal banking regulators to take “prompt corrective action” in respect of
      FDIC-insured depository institutions that do not meet minimum capital
      requirements. FDICIA establishes five capital tiers: “well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized”
and “critically undercapitalized.”  Under applicable regulations, a
      FDIC-insured depository institution is defined to be well capitalized if it
      maintains a Leverage Ratio of at least 5%, a risk adjusted Tier 1 Capital Ratio
      of at least 6% and a Total Capital Ratio of at least 10% and is not subject
      to a
      directive, order or written agreement to meet and maintain specific capital
      levels. An insured depository institution is defined to be adequately
      capitalized if it meets all of its minimum capital requirements as described
      above. In addition, an insured depository institution will be considered
      undercapitalized if it fails to meet any minimum required measure, significantly
      undercapitalized if it is significantly below such measure and critically
      undercapitalized if it fails to maintain a level of tangible equity equal to
      not
      less than 2% of total assets. An insured depository institution may be deemed
      to
      be in a capitalization category that is lower than is indicated by its actual
      capital position if it receives an unsatisfactory examination
      rating.









6


The
      capital-based prompt corrective
      action provision of FDICIA and their implementing regulations apply to
      FDIC-insured depository institutions and are not directly applicable to holding
      companies which control such institutions. However, the Federal Reserve Board
      has indicated that, in regulating bank holding companies, it will take
      appropriate action at the holding company level based on an assessment of the
      effectiveness of supervisory actions imposed upon subsidiary depository
      institutions pursuant to such provisions and regulations.





FDICIA
      generally prohibits an
      FDIC-insured depository institution from making any capital distribution
      (including payment of dividends) or paying any management fee to its holding
      company if the depository institution would thereafter be undercapitalized.
      Undercapitalized depository institutions are subject to restrictions on
      borrowing from the Federal Reserve System. In addition, undercapitalized
      depository institutions are subject to growth limitations and are required
      to
      submit capital restoration plans. A depository institution’s holding company
      must guarantee the capital plan, up to an amount equal to the lesser of 5%
      of
      the depository institution’s assets at the time it becomes undercapitalized or
      the amount of the capital deficiency when the institution fails to comply with
      the plan. The federal banking agencies may not accept a capital plan without
      determining, among other things, that the plan is based on realistic assumptions
      and is likely to succeed in restoring the depository institution’s capital. If a
      depository institution fails to submit an acceptable plan, it is treated as
      if
      it is significantly undercapitalized.





Significantly
      undercapitalized
      depository institutions may be subject to a number of requirements and
      restrictions, including orders to sell sufficient voting stock to become
      adequately capitalized, requirements to reduce total assets and cessation of
      receipt of deposits from correspondent banks. Critically undercapitalized
      depository institutions are subject to appointment of a receiver or conservator
      generally within 90 days of the date on which they became critically
      undercapitalized.





The
      Bank believes that at April 2,
      2007, the Bank was well capitalized under the criteria discussed
      above.





FDICIA
      contains numerous other
      provisions, including accounting, audit and reporting requirements, termination
      of the “too big to fail” doctrine except in special cases, limitations on the
      FDIC’s payment of deposits at foreign branches, new regulatory standards in such
      areas as asset quality, earnings and compensation and revised regulatory
      standards for, among other things, powers of state banks, real estate lending
      and capital adequacy. FDICIA also requires that a depository institution provide
      90 days prior notice of the closing of any branches. Various other legislation,
      including proposals to revise the bank regulatory system and to limit the
      investments that a depository institution may make with insured funds, is from
      time to time introduced in Congress. The TDFI and FDIC will examine the Bank
      periodically for compliance with various regulatory requirements. Such
      examinations, however, are for the protection of the Bank insurance Fund (“BIF”)
      and for depositors, and not for the protection of investors and
      shareholders.





Interstate
      Act. The Riegle-Neal Interstate Banking and Branching Efficiency Act of
      1994 (“Interstate Act”), which was enacted on September 29, 1994, among other
      things and subject to certain conditions and exceptions, permits on an
      interstate basis (i) bank holding company acquisitions commencing one year
      after
      enactment of banks of a minimum age of up to five years as established by state
      law in any state, (ii) mergers of national and state banks after May 31, 1997
      unless the home state of either bank has opted out of the interstate bank merger
      provision, (iii) branching de novo by national and state banks if the host
      state
      has opted-in to this provision of the Interstate Act, and (iv) certain bank
      agency activities after one year after enactment. The Interstate Act contains
      a
      30% intrastate deposit cap, except for the initial acquisition in the state,
      restriction that applies to certain interstate acquisitions unless a different
      intrastate cap has been adopted by the applicable state pursuant to the
      provisions of the Interstate Act and a 10% national deposit cap restriction.
      Tennessee has opted-in to the Interstate Act. Management cannot predict the
      extent to which the business of the Bank may be affected. Tennessee has also
      adopted legislation allowing banks to acquire branches across state lines
      subject to certain conditions, including the availability of similar legislation
      in the other state.





7


Brokered
      Deposits
      and Pass-Through Insurance. The FDIC has adopted regulations under FDICIA
      governing the receipt of brokered deposits and pass-through insurance. Under
      the
      regulations, a bank cannot accept or rollover or renew brokered deposits unless
      (i) it is well capitalized or (ii) it is adequately capitalized and receives
      a
      waiver from the FDIC. A bank that cannot receive brokered deposits also cannot
      offer “pass-through” insurance on certain employee benefit accounts. Whether or
      not it has obtained such a waiver, an adequately capitalized bank may not pay
      an
      interest rate on any deposits in excess of 75 basis points over certain index
      prevailing market rates specified by regulation. There are no such restrictions
      on a bank that is well capitalized. Because it believes that the Bank was well
      capitalized as of April 2, 2007, the Bank believes the brokered deposits
      regulation will have no material effect on the funding or liquidity of the
      Bank.





FDIC
      Insurance
      Premiums. The Bank is required to pay semiannual FDIC deposit insurance
      assessments. As required by FDICIA, the FDIC adopted a risk-based premium
      schedule which increased the assessment rates for most FDIC-insured depository
      institutions. Under the schedule, the premiums initially range from $.00 to
      $.27
      for every $100 of deposits. Each financial institution is assigned to one of
      three capital groups - well capitalized, adequately capitalized or
      undercapitalized - and further assigned to one of three subgroups within a
      capital group, on the basis of supervisory evaluations by the institution’s
      primary federal and, if applicable, state supervisors and other information
      relevant to the institution’s financial condition and the risk posed to the
      applicable FDIC deposit insurance fund. The actual assessment rate applicable
      to
      a particular institution will, therefore, depend in part upon the risk
      assessment classification so assigned to the institution by the FDIC. Recently
      the FDIC has passed a resolution to lower premiums.





Under
      the FDIA, insurance of deposits
      may be terminated by the FDIC upon a finding 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 a federal bank regulatory agency.





Gramm-Leach-Bliley
      Act. The Gramm-Leach-Bliley Act adopted in November 1999 has been
      referred to as the most important banking bill in over 60 years. The most
      significant provisions ratify new powers for banks and bank holding companies,
      especially in the areas of securities and insurance. The Act also includes
      requirements regarding the privacy and protection of customer information held
      by financial institutions, as well as many other providers of financial
      services. There are provisions providing for functional regulation of the
      various services provided by institutions among different regulators. There
      are
      other provisions which limit the future expansion of unitary thrift holding
      companies which now prevent companies like Wal-Mart from owning a thrift
      institution. Finally, among many other sections of the Act, there is some relief
      for small banks from the regulatory burden of the Community Reinvestment Act.
      The regulatory agencies have been adopting many new regulations to implement
      the
      Act.





USA
      Patriot
      Act. On October 26, 2001, President Bush signed the USA PATRIOT Act of
      2001 into law. This act contains the International Money Laundering Abatement
      and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA
      substantially broadens existing anti-money laundering legislation and the
      extraterritorial jurisdiction of the United States, imposes new compliance
      and
      due diligence obligations, creates new crimes and penalties, compels the
      production of documents located both inside and outside the United States,
      including those of foreign institutions that have a correspondent relationship
      in the United States, and clarifies the safe harbor from civil liability to
      customers. The U.S. Treasury Department has issued a number of regulations
      implementing the USA PATRIOT Act that apply certain of its requirements to
      financial institutions such as our banking and broker-dealer subsidiaries.
      The
      regulations impose new obligations on financial institutions to maintain
      appropriate policies, procedures and controls to detect, prevent and report
      money laundering and terrorist financing. The Treasury Department is expected
      to
      issue a number of additional regulations which will further clarify the USA
      PATRIOT Act’s requirements.





8





The
      IMLAFA requires all “financial institutions,” as defined, to establish
      anti-money laundering compliance and due diligence programs no later than April
      2003. Such programs must include, among other things, adequate policies, the
      designation of a compliance officer, employee training programs, and an
      independent audit function to review and test the program. The Bank has
      established anti-money laundering compliance and due diligence programs to
      comply with IMLAFA.





General




The
      Bank, as a Tennessee state
      chartered bank, is subject to primary supervision, periodic examination and
      regulation by the TDFI and the FDIC. If as a result of an examination of a
      bank,
      the FDIC should determine the financial condition, capital resources, asset
      quality, earnings prospects, management, liquidity or other aspects of the
      Bank’s operations are unsatisfactory or that the Bank or its management is
      violating or has violated any law or regulation, various remedies are available
      to the FDIC. Such remedies include the power to enjoin “unsafe or unsound”
practices, to require affirmative action to correct any conditions resulting
      from any violation or practice, to issue an administrative order that can be
      judicially enforced, to direct an increase in capital, to restrict the growth
      of
      the Bank, to assess civil money penalties, to remove officers and directors
      and
      ultimately to terminate a bank’s deposit insurance. The Commissioner of the TDFI
      has many of the same remedial powers, including the power to take possession
      of
      a bank whose capital becomes impaired. As of December 31, 2006, the Bank is
      not
      the subject of any action by the FDIC or the TDFI.





The
      deposits of the Bank are insured by
      the FDIC in the manner and to the extent provided by law. For this protection,
      the Bank pays a semi-annual statutory assessment. The Bank is subject to certain
      regulations of the Federal Reserve Board.





Various
      requirements and restrictions
      under the laws of the State of Tennessee and the United States affect the
      operations of the Bank. State and federal statutes and regulations relate to
      many aspects of the Bank’s operations, including reserves against deposits,
      interest rates payable on deposits, loans, investments, mergers and
      acquisitions, borrowings, dividends, locations of branch offices and capital
      requirements. Further, the Bank is required to maintain certain levels of
      capital.





Payment
      of Dividends





Our
      payment of dividends depends to a
      great extent on the ability of the Bank to pay dividends to us.The Bank
      is subject to the provisions of the Tennessee Banking Act, which provides that
      dividends will be paid out of undivided profits. Capital surplus, however,
      must
      equal or exceed 50% of capital stock, and in the event capital surplus falls
      below 50% of capital stock, no dividends may be paid until net profits have
      been
      transferred to capital surplus so that it equals 50% of capital stock.
      Thereafter, 10% of net profits must be transferred to capital surplus prior
      to
      the payment of dividends until capital surplus equals capital stock. The Bank
      is
      also subject to the minimum capital requirements of the FDIC, which impact
      the
      Bank’s ability to pay dividends to us. If the Bank fails to meet these
      standards, it may not be able to pay dividends to us or to accept additional
      deposits because of regulatory requirements.





If,
      in the opinion of the applicable
      bank regulatory authority, a depository institution is engaged in or is about
      to
      engage in an unsafe or unsound practice (which, depending on the financial
      condition of the depository institution, could include the payment of
      dividends), such authority may require that such institution cease and desist
      from such practice. The federal banking agencies have indicated that paying
      dividends that deplete a depository institution’s capital base to an inadequate
      level would be such an unsafe and unsound practice. Moreover, the Federal
      Reserve Board and the FDIC have issued policy statements which provide that
      bank
      holding companies and insured depository institutions generally should only
      pay
      dividends out of current operating earnings.





Our
      payment of dividends may also be
      affected or limited by other factors. For example, the Bank is required to
      maintain adequate capital above regulatory guidelines.





9


ITEM
      2.    DESCRIPTION OF PROPERTY





We
      operate five full-service banking
      facilities. We own our two Oak Ridge branch facilities and lease our current
      operating Knoxville location. We lease both the building and property of our
      Knoxville Farragut location and lease the land for our Cedar Bluff location
      while owning the building. Additionally, we currently lease space in Maryville,
      Tennessee, Blount County awaiting the completion of a permanent branch location
      anticipated to open by mid-year 2007.





The
      main office is located at 401 S.
      Illinois Avenue in Oak Ridge. The 15,000 square foot facility sits on
      approximately three acres and offers full service banking including ATM, safe
      deposit, night depository and drive-thru services. The main office also houses
      the operations and bookkeeping department, credit administration, and most
      other
      administrative functions.





Our
      Jackson Square office is located at
      900 Oak Ridge Turnpike in Oak Ridge. This 2,000 square foot facility offers
      full
      service banking including ATM, safe deposit, night depository, and drive-thru
      services.





Our
      Farragut branch is located at 11200
      Kingston Pike in Knoxville, Tennessee. It is a full service branch with
      approximately 4,000 square feet. The lease for Farragut is $6,000 monthly with
      a
      term of 10 years with two five year renewal options and purchase option after
      the initial ten year term.





Our
      Cedar Bluff branch is located at
      1005 N. Cedar Bluff Road, Knoxville, Tennessee. This property is leased at
      $2,917 per month. This lease was made effective March 15, 2004 and has an
      initial term of 20 years with four successive five-year renewal
      periods.





Our
      Maryville office is currently
      located at 543 W. Lamar Alexander Parkway, Maryville, Tennessee. We lease
      approximately 1,000 square feet for this location. Terms of this lease are
      $1,250 per month for one year with an option to renew for an additional two
      years with rent to be determined at renewal by both parties. We are in process
      of completing a permanent structure in close proximity to take the place of
      the
      current leased office. The branch will be located at 1311 West Lamar Alexander
      Parkway, Maryville, Tennessee. We own both the land and building of this new
      location.





Additionally,
      we own property located
      on E. Tri-County Blvd in Oliver Springs. This location was obtained by
      foreclosure in 2004. The property has a 2,500 square foot commercial garage
      which we currently utilize for general storage.








ITEM
      3.    LEGAL PROCEEDINGS





From
      time to time in the normal course
      of business, we are subject to various regulatory proceedings, lawsuits, claims
      and other matters. At this time, we do not believe any of these matters will
      result in a material adverse effect on our business or financial
      condition.





ITEM
      4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS





No
      matters were submitted to a vote of
      security holders during the Company’s last quarter of fiscal year
      2006.


10


PART
      II








ITEM
      5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND OTHER
      SHAREHOLDER MATTERS





Effective
      May 22, 2006, the Company
      completed a two for one stock split. Holders of record on May 1, 2006 received
      one additional share of Tennessee Valley Financial Holdings, Inc., common stock
      for each share they held. Additionally, the market value at the time of the
      split ($28.00) was decreased to $14.00. Based on the structure of this split
      and
      stock dividend transaction, all shareholders percentages of ownership were
      unaffected.





Subsequent
      to the stock split, the
      Company had a secondary stock offering to raise additional capital. Upon closing
      of this general public offering on October 30, 2006, the Company raised
      approximately $5.6 million in proceeds from the sale of TVFH common stock.
      An
      estimated $5.3 million of these proceeds were injected directly into the equity
      capital structure of the Bank. The Company retained the balance of the net
      proceeds for working capital and other general corporate purposes.





On
      April 2, 2007, Tennessee Valley
      Financial Holdings, Inc., had 1,509,571 shares of common stock outstanding.
      The
      Company’s shares began being quoted on the OTC Bulletin Board in November 2006
      but are not listed on a national securities exchange. The Company’s stock trades
      under the symbol “TVFH”. Howe Barnes Hoefer and Arnett, Inc. is the principal
      market maker for Tennessee Valley Financial Holdings, Inc., stock. As of April
      2, 2007, the Company estimates that it had approximately 950 shareholders of
      record. The following table shows a range of high and low sales prices, based
      on
      the best of management’s knowledge for transactions completed prior to Company
      shares being listed on the OTC Bulletin Board.





High
            Low2006:First
                Quarter
            $28.00
            $28.00Second
                Quarter
                (1)
            14.00
            14.00Third
                Quarter (1)
            14.00
            14.00Fourth
                Quarter
                (1)
            14.50
            14.002005:First
                Quarter
            $26.00
            $26.00Second
                Quarter
            26.00
            26.00Third
                Quarter
            26.00
            26.00Fourth
                Quarter
            28.50
            28.50


(1)  Stock
      price reflects
      effect of two for one stock split effective May 22, 2006.





The
      payment of cash dividends is
      subject to the discretion of our board of directors. Our ability to pay
      dividends is dependent on cash dividends paid to us by the Bank. The ability
      of
      the Bank to pay dividends to us is restricted by applicable regulatory
      requirements. See ITEM 1, “Description of Business – Payment of Dividends.” The
      Company did not pay a dividend in 2006. We paid a dividend of $0.15 per share
      on
      January 15, 2007. We cannot assure you that we will declare additional dividends
      or, if declared, what the amount of the dividend would be or whether dividends
      would continue in future periods.





11


The
      following table provides
      information about our equity compensation plans as of December 31,
      2006.








Equity
                Compensation Plan
                InformationPlan
                Category
            Number
                of securities to be issued
              upon
                exercise of outstanding
              options,
                warrants and rights
            Weighted-average
                exercise price of outstanding options, warrants and
              rights
            Number
                of securities remaining
              available
                for future issuance under
              equity
                compensation planEquity
                compensation
              plans
                approved by
              shareholders
            97,200
            $11.76
            116,412Equity
                compensation
              plans
                not approved
              by
                shareholders
            0
            NA
            0Total
            97,200
            $11.76
            116,412






ITEM
        6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


Forward
      Looking Statements





This
      report contains forward-looking
      statements under the Private Securities Litigation Reform Act of 1995 that
      involve risks and uncertainties. When used in this discussion, the words
“believes”, “anticipates”, “contemplates”, “expects”, and similar expressions
      are intended to identify forward-looking statements. Such statements are subject
      to certain risks and uncertainties which could cause actual results to differ
      materially from those projected. Although we believe that the assumptions
      underlying the forward-looking statements are reasonable, any of the assumptions
      could be inaccurate, and therefore, we cannot assure you that the
      forward-looking statements set out in this report will prove to be
      accurate.





Factors
      that could cause actual results
      to differ from the results discussed in the forward-looking statements include,
      but are not limited to:





·
            Economic
                conditions (both generally and more specifically in the markets in
                which
                we operate);


·
            Competition
                for our customers from other providers of financial
                services;


·
            Government
                legislation and regulation (which changes from time to time and over
                which
                we have no control);


·
            Changes
                in interest rates; and


·
            Material
                unforeseen changes in liquidity, results of operations, or financial
                condition of our customers.





These
      risks are difficult to predict and many of them are beyond our
      control.





12


Results
      of Operations for the Years Ended December 31, 2006 and 2005





General





We
      are a Tennessee bank holding company
      which acquired the Bank through a share exchange in May 2002. We are a
      registered bank holding company under the Federal Reserve Act. Our only activity
      is owning the Bank which commenced operations on May 30, 1995.





We
      achieved net income of $782,000 for
      2006 compared to $935,000 for 2005, a decrease of 16%. On a per share basis,
      we
      earned $0.64 per common share in 2006 compared to $0.88 per common share in
      2005. The decrease in net income for 2006 can primarily be attributed to
      increases in interest expense and non interest expenses. Interest expense
      increased to $5.1 million in 2006 compared to $3.2 million in 2005. Non-interest
      expense increased $1.3 million from 2005. The increase in non-interest
      expense is primarily related to growth in overhead brought on by the growth
      in assets of the Bank and expenses related to overall growth and expansion
      strategies. Offsetting the increase in interest expense was an increase of
      $2.7
      million in interest income aided by a rising rate environment. Non interest
      income slightly improved with a $95,000 increase in 2006. Net interest income
      increased $809,000, or 14%, in 2006 compared to 2005 primarily as a result
      of
      growth in earning assets, particularly loans and Federal Funds
      Sold.





The
      table
      below presents certain key ratios.





2006
            
            
            2005Return
                on Average
                Assets
            
            
            0.48
            %
            
            
            0.67
            %Return
                on Average
                Equity
            
            
            6.74
            %
            
            
            8.36
            %Dividend
                Payout
                Ratio
            
            
            0.00
            %
            
            
            16.04
            %Average
                Equity to Average
                Assets
            
            
            7.10
            %
            
            
            8.06
            %


Earning
      Assets, Sources of Funds and Net Interest Income





Schedule
      II presents an analysis of
      interest earning assets and interest bearing liabilities for the years ended
      December 31, 2006 and 2005.





Schedule
                II
              Average
                Balances, Interest and Rate/Yield2006
            
            2005Average
              Balance(1)
            
            Interest
            
            Average
              Yield/Rate
            
            Average
              Balance
                (1)
            
            Interest
            
            Average
              Yield/RateAssetsFederal
                funds
                sold
            $      
                        5,890
            
            $      
                289
            
            4.91%
            
            $    
                6,353
            
            $      
                201
            
            3.16%Investment
                securities:Available
                for
                sale:Taxable
            12,422
            
            515
            
            4.15%
            
            10,696
            
            364
            
            3.40%Tax
                exempt
            6,837
            
            310
            
            4.52%
            
            6,279
            
            302
            
            4.81%FHLB
                Stock
            619
            
            35
            
            5.68%
            
            587
            
            27
            
            4.60%Gross
                loans, including fees
            128,389
            
            10,341
            
            8.05%
            
            107,315
            
            7,883
            
            7.35%Total
                interest
                earningassets
            154,157
            
            $11,490
            
            7.45%
            
            $131,230
            
            $    
                8,777
            
            6.69%All
                other
                assets
            10,781
            
            
            
            
            
            9,072Less:Reserve
                for loan
                losses
            1,492
            
            
            
            
            
            1,317Unearned
                fees and interest
            135
            
            
            
            
            
            135Total
                assets
            $163,311
            
            
            
            
            
            $138,850








(continued)


13





2006
            
            2005Average
              Balance(1)
            
            Interest
            
            Average
              Yield/Rate
            
            Average
              Balance
                (1)
            
            Interest
            
            Average
              Yield/RateLiabilities
              and Shareholders'
              EquityInterest-bearing
                deposits:Time
                deposits
            $81,536
            
            $    
                3,678
            
            4.51%
            
            $60,422
            
            $    
                2,054
            
            3.40%Other
                deposits
            45,222
            
            881
            
            1.95%
            
            46,097
            
            671
            
            1.46%FHLB advances
                and
              repurchaseagreements
              and
                other
            10,860
            
            534
            
            4.92%
            
            10,896
            
            464
            
            4.26%Total
                interest-bearingliabilities
            137,617
            
            $    
                5,093
            
            3.70%
            
            117,415
            
            $    
                3,189
            
            2.72%Non-interest
                bearingdeposits
            13,008
            
            
            
            
            
            10,850Cost
                of funds
            
            
            
            
            3.38%
            
            
            
            
            
            2.49%All
                other
                liabilities
            927
            
            
            
            
            
            893Shareholders'
                equity
            11,592
            
            
            
            
            
            9,686Unrealized
                gain (loss)
                onavailable
                for
                salesecurities
            166
            
            
            
            
            
            6Total
                liabilities
                andshareholders'
                equity
            $163,311
            
            
            
            
            
            $138,850Net
                interest
                spread
            
            
            
            
            4.07%
            
            
            
            
            
            4.20%Net
                interest
                margin
            
            
            
            
            4.15%
            
            
            
            
            
            4.26%





(1)
            Average
                Balances were computed averaging daily balances for the time
                specified.







As
      seen from Schedule II, average
      interest-earning assets grew $22.9 million or 17% during 2006 as compared to
      2005.  The primary component of growth in average interest- earning assets
      was loans, which grew $21.1 million or 20% in 2006 as compared to 2005. Average
      investment securities (which includes average available for sale taxable and
      tax-exempt securities and Federal Home Loan Bank Stock) increased approximately
      $2.3 million in 2006 as compared to 2005, while average federal funds sold
      declined approximately $463,000 in 2006 as compared to 2005.





Average
      interest-bearing liabilities
      grew $20.2 million or 17% in 2006 as compared to 2005. Average interest bearing
      liabilities include deposits, advances from the Federal Home Loan Bank, which
      we
      refer to as the “FHLB,” and other borrowings. During 2006, average total
      deposits grew $20.2 million or 19% as compared to 2005. The majority of the
      average deposit growth during 2006 came from other time deposits, which include
      certificates of deposits. The notable increase in time deposits is primarily
      due
      to several deposit promotional programs.





The
      yield on average interest earning
      assets increased 76 basis points during 2006 to 7.45%. The primary reason for
      this increase can be attributed to the continued rising rate environment through
      mid-year 2006. The incremental raising of key interest rates by the Federal
      Reserve which began in July 2004 continued through June 2006 to its current
      level of 8.25%. The yield on earning assets has benefited by the immediate
      upward adjustment of rates on our loans tied to prime rate, as well as the
      addition of new loans added at higher rates in the recent rising rate
      environment.





The
      yield on loans for 2006 was 8.05%,
      an increase of 70 basis points as compared to 2005. The performance of the
      loan
      portfolio can be primarily attributed to the interest rate environment as
      discussed previously. New loans made during 2006 generally carried higher yields
      than those originated in 2005. Yields on taxable investment securities increased
      75 basis points and yields on tax-exempt securities declined 29 basis
      points during 2006 as compared to 2005. The increase in the yield on taxable
      investment securities can be attributed to the sales and calls of lower yielding
      taxable securities while purchasing of higher yielding securities increased.
      Because of the increase in purchase, interest payments and prepayments
      (mortgage-backed securities) have increased leading to higher yields on taxable
      securities. The yield on federal funds increased 175 basis points in 2006
      compared to 2005 directly related to the increasing interest rate
      environment.






14





Our
      cost of funds increased 89 basis
      points during 2006 to 3.38%. This level can be primarily attributed to the
      general interest rate environment described above. Rates on time deposits
      increased 111 basis points to 4.51% in 2006 as compared to 2005. Other
      interest-bearing deposits saw rates increase 49 basis points during 2006 to
      1.95%. Rates on time deposits increased as lower yielding time deposits matured
      and were replaced with time deposits carrying higher rates. Other interest
      bearing deposits do not have contractual maturities; rates on those deposits
      can
      be changed at management’s discretion but are subject to competitive pressures
      and our need for liquidity. Rates on FHLB Advances, repurchase agreements and
      capital lease obligations increased 66 basis points during 2006 to 4.92% due
      to
      the overall interest rate environment. We have a cash management line of credit
      with the FHLB which is priced at an overnight interest rate.





Our
      net interest margin slightly
      decreased to 4.07% in 2006 compared to 4.20% during 2005. Tightening of the
      net
      interest margin in 2006 compared to 2005 can be attributed to the addition
      of a
      larger volume of time deposits in relation to the addition of loans, our highest
      yielding earning asset.





Schedule
                III
              Rate
                Volume Analysis (in Thousands)2006
                vs 2005
              Increase
                (decrease) due to change inAverage
                Balance
            
            
            Rate/Yield
            
            
            TotalInterest
                income:Federal
                funds
                sold
            
            $
            (13
            )
            
            $
            101
            
            
            $
            88Securities
                available for
                sale
            
            
            72
            
            
            
            87
            
            
            
            159FHLB
                stock
            
            
            1
            
            
            
            6
            
            
            
            7Loans,
                including
                fees
            
            
            1,655
            
            
            
            803
            
            
            
            2,458Total
                interest
                income
            
            
            1,715
            
            
            
            997
            
            
            
            2,712Interest
                expense:Interest-bearing
                deposits
            
            
            827
            
            
            
            1,007
            
            
            
            1,834FHLB
                  advances, repurchase agreement
                  and other
            
            
            (2
            )
            
            
            72
            
            
            
            70Total
                interest
                expense
            
            
            825
            
            
            
            1,079
            
            
            
            1,904Net change in net interest income
            
            $
            890
            
            
            $
            (82
            )
            
            $
            808




Non-Interest
      Income





Non-interest
      income increased
      approximately $95,000 or approximately 11% in 2006 as compared to 2005 due
      primarily to increases in fees on loans sold, service charges on demand
      deposits, gains on sales of investment securities, and other income. We offer
      traditional residential mortgage financing through the secondary market. Under
      this program, we originate residential mortgage loans, which are in turn funded
      and serviced by secondary market lenders and we receive fees for our loan
      origination. Fees on loans sold increased approximately $15,000 during 2006
      as
      compared to 2005. This increase was due primarily to a continued volume of
      mortgage refinancing aided by steady favorable mortgage rates. Service charges
      on demand deposits increased approximately $17,000 during 2006 compared to
      2005
      mainly due to an increase in the volume of our deposit accounts as a result
      of
      two branch openings at year-end 2005. Gains on sales of investment securities
      were the result of sales to take advantage of routine fluctuations in the bond
      markets. These proceeds were up approximately $17,000 from 2006. Other income
      increased approximately $46,000 during 2006 as compared to 2005 primarily due
      to
      favorable gains on sale of repossessed assets.





15


Non-interest
      income increased
      approximately $77,000 or 9% in 2006 as compared to 2005 due primarily to
      increases in fees on loans sold, service charges on demand deposits, and other
      income. Fees on loans sold increased approximately $27,000 during 2005 as
      compared to 2004. The increase was the result of a continued volume of mortgage
      refinancing driven by steady favorable mortgage rates. Service charges on demand
      deposits increased approximately $20,000 during 2005 as compared to 2004 due
      primarily to an increase in the volume of our deposit accounts and increased
      ATM
      fees for non-customers. Other income increased approximately $45,000 during
      2005
      as compared to 2004 due primarily to investment fee income.





Non-Interest
      Expense





Non-interest
      expense increased
      approximately $1.3 million, or 29%, during 2006 as compared to 2005. This
      increase is mainly the result of expansion initiatives which necessitates growth
      in non-interest expense to support safe and sound asset growth. Five categories
      of non-interest expense had increases of more than 20% from 2005 including
      salaries and employee benefits, net occupancy expense, data processing fees,
      legal and professional fees, and loan expense. Salaries and employee benefits
      increased $579,000, or 27%, in 2006 compared to 2005. This increase was a result
      of the hiring of additional personnel to enhance loan growth and expansion
      strategies. Net occupancy expense increased $260,000, or 48%, in 2006 compared
      to 2005. This increase was a result of our addition of two new locations at
      year-end 2005. Data processing fees increased $109,000, or 28%, in 2006 compared
      to 2005. This increase was a result of expenses associated with network
      enhancement, maintenance, and processing costs for greater volumes of items
      due
      to expansion. Legal and professional fees increased $53,000, or 43%, in 2006
      compared to 2005. This was primarily due to increased costs associated with
      regulatory compliance issues of being a publicly held company. Loan expense
      increased $149,000, or 69%, in 2006 compared to 2005. This increase was a direct
      result of the increased loan volume experienced in 2006.





All
      other categories were below a 20%
      increase level. Furniture and equipment depreciation and maintenance expense
      increased $24,000 to $241,000. Advertising and promotion increased $19,000
      to
      $144,000. Office supplies and postage increased $13,000 to $193,000. Other
      expenses increased $82,000 to $493,000. Directors fees decreased $2,000 to
      $115,000.





Non-interest
      expense increased
      approximately $449,000 or 11% during 2005 as compared to 2004. This increase
      is
      mainly the result of two new branch locations which necessitates growth in
      non-interest expense to support safe and sound asset growth. One category of
      non-interest expense had an increase of more than 20% from 2004. Data processing
      fees increased $102,000, or 35%, in 2005 compared to 2004. This increase was
      mainly due to expenses associated with network enhancement, maintenance, and
      processing fees for greater volumes of items due to growth factors. Salaries
      and
      employee benefits totaled $2.2 million, representing an increase of $239,000.
      Occupancy costs equaled $542,000, representing an increase of $78,000. Furniture
      and equipment depreciation and maintenance costs totaled $217,000, an increase
      of $19,000. Other expenses increased $62,000 over 2004.





Income
      Taxes





We
      recognize income taxes under the
      asset and liability method established in Statement of Financial Accounting
      Standards No. 109, Accounting
      for Income Taxes. Under this method, deferred tax assets and liabilities
      are established for the temporary differences between the accounting basis
      and
      the tax basis of our assets and liabilities at enacted tax rates expected to
      be
      in effect when the amounts related to such temporary differences are realized
      or
      settled. Our deferred tax assets are reviewed quarterly and adjustments to
      such
      assets are recognized as deferred income tax expense or benefit based on
      management’s judgment relating to the realizability of such assets.





We
      recognized income tax expense of
      approximately $358,000 for 2006 compared to approximately $487,000 in
      2005.





16


Loan
      Losses and Credit Risk





The
      allowance for loan losses is
      established by charging expense at an amount which will maintain the allowance
      for loan losses at a level sufficient to provide for potential loan losses.
      We
      charge loan losses directly to the allowance when incurred and we credit
      recoveries to the allowance when realized. We base the amount of provision
      on
      past loss experience, management’s evaluation of the loan portfolio under
      current economic conditions, and other factors based on management’s knowledge
      of the current loan portfolio. The balance of the allowance for loan losses
      was
      $1,577,000, or 1.10%, of gross loans outstanding at December 31, 2006. During
      2006, the loan loss provision totaled $471,000, a decrease of approximately
      $80,000 as compared to 2005. The
      net
      charge-off ratio decreased to 0.23% from 2005 and steady loan growth continued,
      required reserve allocations were alleviated by the payoff of certain classified
      assets, which were reserved at a higher allocation than loans which are not
      classified. As of December 31, 2006, management’s review of the allowance for
      loan losses concluded that the balance was adequate to provide for potential
      losses based upon an evaluation of risk in the loan portfolio. Despite our
      credit standards, internal controls, and continuous loan review process, the
      inherent risk in the lending process results in periodic
      charge-offs.





Through
      the provision for loan losses,
      we maintain a reserve for loan losses that management believes is adequate
      to
      absorb losses within the loan portfolio. In addition, various regulatory
      agencies, as an integral part of their examination procedures, periodically
      review our reserve for loan losses, and based on their judgment may require
      us
      to recognize additions to the reserve for loan losses. Management completes
      a
      formal analysis of the reserve for loan losses adequacy on a monthly basis.
      This
      formal analysis of the allowance for loan loss reserve segregates the loan
      portfolio into general and specifically classified categories. Management
      employs a loan grading system for all loans based on credit quality. Loans
      in
      the four lowest categories are considered specifically classified and allocated
      a higher percentage of potential loan loss than the general loan population.
      The
      general loan population is segregated by collateral type and a reserve amount
      is
      assigned based on the historical loss ratio and expected future loss potential
      for that particular collateral type. For specifically classified loans, reserve
      amounts are assigned based on rates defined in the Bank’s loan policy and
      consistent with industry standards and regulatory guidance. The rates defined
      by
      our loan policy are determined based on a variety of factors including our
      historical loss experience, industry loss rates, guidance received from previous
      regulatory examinations, and other factors such as the borrower’s ability to
      repay the loan and the availability of the collateral. As of December 31, 2006
      approximately $1.9 million of the loan portfolio was considered specifically
      classified with approximately 13.6% of the allowance for loan losses related
      to
      these loans. We assigned the remaining 86.4% of the allowance for loan losses
      to
      the general population of loans.





Included
      in management’s formal
      analysis of the allowance for loan losses are loans considered impaired as
      provided in Statement of Financial Accounting Standards No. 114 “Accounting by
      Creditors for Impairment of a Loan.” A loan is considered impaired when, based
      on current information and events, it is probable that we will be unable to
      collect all amounts due according to the contractual terms of the loan
      agreement. Impairment losses are measured based on the present value of expected
      future cash flows discounted at the loan’s effective interest rate or the fair
      value of the underlying collateral. Loans in our lowest three adversely
      classified categories are considered for impairment. Due to the relatively
      small
      size of our loan portfolio, management considers each individual loan
      specifically for impairment. The allowance for loan losses related to impaired
      loans amounted to approximately $333,000 as of December 31, 2006 and $338,000
      as
      of December 31, 2005. Schedules IV and V present a summary of our loan loss
      experience and reserve analysis during 2006 and 2005.


17





Schedule
                IV
              Analysis
                of Loan Loss Reserve (in Thousands)Year
                Ended December 31,2006
            
            
            2005Balance
                at beginning of
                period
            
            $
            1,406
            
            
            $
            1,271Charge-offs:Commercial,
                financial and
                agricultural
            
            
            16
            
            
            
            2Real
                estate –
                mortgage
            
            
            96
            
            
            
            240Installment
–
                consumer
            
            
            168
            
            
            
            205Other
            
            
            61
            
            
            
            -Total
                charge-offs
            
            
            341
            
            
            
            447Recoveries:Commercial,
                financial and
                agricultural
            
            
            12
            
            
            
            -Real
                estate –
                construction
            
            
            -
            
            
            
            -Real
                estate –
                mortgage
            
            
            -
            
            
            
            -Installment
–
                consumer
            
            
            29
            
            
            
            30Other
            
            
            1
            
            
            
            1Total
                recoveries
            
            
            42
            
            
            
            31Net
                charge-offs
            
            
            299
            
            
            
            416Provision
                for loan
                losses
            
            
            471
            
            
            
            551Balance
                at the end of
                period
            
            $
            1,578
            
            
            $
            1,406Ratio
                of net charge-offs to
                average loans outstanding
            
            
            0.23
            %
            
            
            0.39
            %








Schedule
                V
              Allocation
                of Loan Loss Reserve (in Thousands)2006
            
            2005$
              Allocation
            
            %
              Allocation
            
            $
              Allocation
            
            %
              AllocationCommercial,
                financial and
                agricultural
            $         
                450
            
            35%
            
            $         
                592
            
            42%Real
                estate -
                construction
            30
            
            2%
            
            22
            
            2%Real
                estate -
                mortgage
            644
            
            51%
            
            577
            
            41%Installment
                -
                consumer
            316
            
            12%
            
            215
            
            15%Other
            -
            
            0%
            
            -
            
            0%Total
            $      
                1,577
            
            
            
            $      
                1,406




Summary
      of Loans and Non-Performing Assets





Non-performing
      assets consist
      of


(a)
      loans no longer accruing interest
      due to doubts about future collectibility;


(b)
      loans more than 90 days past due
      for the last principal or interest payment;


(c)
      loans restructured due to the
      borrower’s inability meet the contractual loan terms; and


(d)
      other real estate owned by us,
      taken originally as loan collateral.





18


Schedule
      VI presents the amounts of
      non-performing assets at December 31, 2006 and 2005.





Schedule
                VI
              Non-Performing
                Assets (in Thousands)December
                31,2006
            
            2005Non-accrual
                loans
                (1)
            $             
                326
            
            $             
                283Loans
                past due
                greater than 90 days and still accruing interest (2)
            19
            
            10Restructured
                loans
            170
            
            125Other
                real estate
                owned
            507
            
            -Total
                non-performing
                assets
            $          
                1,022
            
            $             
                418




(1)
            Included
                in non-accrual loans is approximately $320,000 and $283,000 of loans
                considered impaired as of December 31, 2006 and 2005,
                respectively.


(2)
            Included
                in loans past due 90 days or more and still accruing interest are
                approximately $19,000 and $10,000 considered impaired as of December
                31,
                2004 and 2003, respectively. At December 31, 2004 approximately $69,000
                of
                loans considered restructured were also considered
                impaired.





We
      determine loans to be non-accruing
      when we determine that our ability to collect the unpaid balance of these loans
      is highly unlikely due to the financial position of the borrower and general
      economic conditions. Management makes this determination of classification
      on a
      case by case basis for problem loans. Generally, we review each loan 90 days
      or
      more past due monthly and we place on non-accrual status the loans for which
      we
      determine collection is doubtful. During 2006, we would have earned
      approximately $39,000 on loans in non-accrual status had these loans been
      current in accordance with their terms.





Loans
      are determined to be 90 days
      delinquent when such a period of time has elapsed since the last required
      payment of principal or interest was made. At such time, we consider whether
      to
      place the loan on non-accrual status. However, until we make this
      classification, interest will continue to accrue.





Non-accrual
      loans increased to
      approximately $326,000 as of December 31, 2006 compared to $283,000 as of
      December 31, 2005. While there is a slight increase noted in the amount of
      non-accrual loans compared to December 31, 2005, the level of non-accrual loans
      compared to outstanding net loans is comparable to the prior year
      end.  Of the loans in non-accrual status as of December 31, 2005,
      approximately $12,000 were charged off during 2006. Additionally, approximately
      $1.8 million were added to non-accrual status during
      2006.  Approximately $1.4 million were removed from non-accrual
      status because of improvement in performance, paydowns, payoffs,
      charge-offs, restructuring, or foreclosure.  Non-accrual loans as of
      December 31, 2006 includes $53,000 in loans that were non-accrual as of December
      31, 2005.  There were two loans totaling $19,000 that were over 90
      days and still accruing interest as of December 31, 2006.  It is our
      policy to place loans on non-accrual after they reach 90 days past due unless
      the loan is well collateralized.





Net
      charge-offs decreased to $299,000
      during 2006 as compared to $416,000 in 2005. The ratio of net charge-offs to
      average loans was 0.23% for 2006 and 0.39% for 2005. Decreased charge-offs
      were
      primarily achieved due to our ability to obtain above average quality of assets
      and internal credit administration procedures.





19


Loans
      increased $32.9 million to $141.3
      million as of December 31, 2006 as compared to December 31, 2005. Management
      attributes this continued growth to a still rather favorable interest rate
      environment, aggressive growth strategies in the Knoxville and Maryville markets
      and the strong effort of our lending personnel. The primary categories of growth
      were construction and land development, commercial and industrial, and consumer
      loans.





Schedule
                VII
              Loans
                by Type (in Thousands)December
                31,2006
            
            
            2005Loans
                secured by real
                estate:Commercial
                properties
            
            $
            15,778
            
            
            $
            15,209Construction
                and land
                development
            
            
            36,561
            
            
            
            25,610Residential
                and other
                properties
            
            
            41,444
            
            
            
            36,143Total
                loans secured by real
                estate
            
            
            93,793
            
            
            
            76,962Commercial
                and industrial
                loans
            
            
            23,308
            
            
            
            18,510Consumer
                loans and
                other
            
            
            25,879
            
            
            
            14,407142,980
            
            
            
            109,879Less:
                Allowance for loan
                losses
            
            
            (1,578
            )
            
            
            (1,406
            )Unearned
                loan fees
            
            
            (140
            )
            
            
            (127
            )$
            141,262
            
            
            $
            108,346





Investment
      Securities





Investment
      securities were $20.2
      million as of December 31, 2006 compared to $18.7 million as of December 31,
      2005. At December 31, 2006 and 2005, all of our investment securities were
      classified available for sale. During 2006, $6.1 million in available for sale
      securities were purchased as compared to $10.3 million in purchases of available
      for sale securities in 2005. Maturities, calls and principal payments received
      from mortgage-backed securities totaled $3.5 million in 2006 and $1.8 million
      in
      2005. Proceeds from the sale of available for sale securities totaled $1.1
      million, with gross gains on these sales of $23,000 and gross losses of $0.
      Proceeds from the sale of available for sale securities in 2005 totaled $4.3
      million, with gross gains on the sales of $22,000 and  gross losses of
      $16,000. These sales were used to fund loan demand and to reinvest funds in
      higher yielding investment securities. The unrealized loss on available for
      sale
      securities was $110,000 at December 31, 2006 compared to $176,000 at December
      31, 2005. The fair value of debt securities fluctuates with the movement of
      interest rates. Generally, during periods of declining interest rates, the
      fair
      value of debt securities increases whereas the opposite may hold true in a
      rising interest rate environment.





The
      investment portfolio is primarily
      comprised of U.S. Government and federal agency obligations and mortgage-backed
      securities issued by the Federal Home Loan Mortgage Corporation, the FHLB,
      the
      Federal Farm Credit Bank , the Government National Mortgage Association , Small
      Business Administration and the Federal National Mortgage Association;
      bank-qualified, investment-grade state, county and municipal bonds; and
      corporate debt securities. Our investment policy prohibits us from investing
      in
      state, county and municipal bonds rated Baa or lower by Moody’s or BBB by
      S&P. Mortgage-backed issues comprised 32% of the portfolio at December 31,
      2006 and 32% at December 31, 2005. Schedule VIII sets forth the maturity of
      the
      securities held in the investment portfolio as of December 31,
      2006:


20





Schedule
                VII
              Maturities
                of Securities at December 31, 2006
              (Dollars
                in Thousands)Due
                in One Year or Less
            
            
            Due
                After One Year Through
              Five
                Years
            
            
            Due
                After Five Years Through
              Ten
                YearsAmount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            YieldSecurities
                available for sale:U.S.
                Treasury Securities
                andObligations
                of U.S.
                Governmentcorporations
                and
                agencies
            
            $
            1,244
            
            
            
            4.31
            %
            
            $
            3,704
            
            
            
            4.16
            %
            
            $
            1,481
            
            
            
            3.92
            %Mortgage-backed
                and
                relatedsecurities
            
            
            17
            
            
            
            7.79
            %
            
            
            280
            
            
            
            4.27
            %
            
            
            667
            
            
            
            4.16
            %Obligations
                of State and
                politicalsubdivisions
            
            
            100
            
            
            
            5.67
            %
            
            
            760
            
            
            
            6.35
            %
            
            
            1,544
            
            
            
            4.46
            %Total
                debt
                securities
            
            $
            1,361
            
            
            
            4.45
            %
            
            $
            4,744
            
            
            
            4.52
            %
            
            $
            3,692
            
            
            
            5.40
            %Due
                After Ten Years
            
            
            TotalAmount
            
            
            Yield
            
            
            Amount
            
            
            YieldSecurities
                available for sale:U.S.
                Treasury Securities
                andObligations
                of U.S.
                Governmentcorporations
                and
                agencies
            
            $
            218
            
            
            
            6.23
            %
            
            $
            6,647
            
            
            
            4.52
            %Mortgage-backed
                and
                relatedsecurities
            
            
            5,561
            
            
            
            5.15
            %
            
            
            6,525
            
            
            
            5.11
            %Obligations
                of State and
                politicalsubdivisions
            
            
            4,580
            
            
            
            5.80
            %
            
            
            6,984
            
            
            
            5.81
            %Total
                debt
                securities
            
            $
            10,359
            
            
            
            5.46
            %
            
            $
            20,156
            
            
            
            5.19
            %





Asset/Liability
      Management and Interest Rate Risk Management





Asset/liability
      management is the
      process of planning, implementing and controlling the mix and maturity features
      of our interest bearing assets and liabilities to maximize net interest margin
      and minimize the risk of negative effects on net interest margin by changes
      in
      market interest rates. One tool utilized in our asset liability management
      process is the Interest Rate Sensitivity Analysis presented in Schedule IX.
      The
      Interest Rate Sensitivity Analysis evaluates gaps between repricing frequencies
      of our interest earning assets and interest bearing liabilities. As seen from
      this analysis, we are in a negative gap position in both repricing categories
      through three months to one year. This could result in a decline in net interest
      should interest rates decline. Management continually monitors the asset
      liability position and takes corrective measures where possible.





Schedule
                IX
              Interest
                Rate Sensitivity Analysis (in Thousands)
              As
                of December 31, 2006Within
              3
                Months
            
            
            3
                Months to
              1
                year
            
            
            1
                to
              5
                Years
            
            
            After
              5
                Years
            
            
            YieldEarning
                assets:Loans
            
            $
            61,126
            
            
            $
            11,946
            
            
            $
            68,404
            
            
            $
            2,292
            
            
            $
            143,768Investment
                securities
            
            
            916
            
            
            
            2,486
            
            
            
            6,567
            
            
            
            10,187
            
            
            
            20,156Federal
                funds
                sold
            
            
            11,941
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            11,941Total
                earning
                assets
            
            
            73,983
            
            
            
            14,432
            
            
            
            74,971
            
            
            
            12,479
            
            
            
            175,865Interest-bearing
                liabilities:Interest-bearing
                deposits
            
            
            61,958
            
            
            
            65,621
            
            
            
            11,830
            
            
            
            -
            
            
            
            139,409FHLB
                advances
            
            
            1,000
            
            
            
            1,000
            
            
            
            10,500
            
            
            
            -
            
            
            
            12,500Federal
                funds
                purchased
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
                borrowings
            
            
            491
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            491Total
                interest-bearing
                liabilities
            
            
            63,449
            
            
            
            66,621
            
            
            
            22,330
            
            
            
            -
            
            
            
            152,400Repricing
                gap
            
            
            10,534
            
            
            
            (52,189
            )
            
            
            52,641
            
            
            
            12,479
            
            
            
            12,479Repricing
                gap as a percentage of
                earning assets
            
            
            6.0
            %
            
            
            -29.7
            %
            
            
            29.9
            %
            
            
            7.1
            %Cumulative
                repricing
                gap
            
            
            10,534
            
            
            
            (41,655
            )
            
            
            10,986
            
            
            
            23,465
            
            
            
            23,465Cumulative
                repricing gap as a
                percentage ofearning
                assets
            
            
            6.0
            %
            
            
            -23.7
            %
            
            
            6.2
            %
            
            
            13.3
            %


Management
      has made the following assumptions in this interest rate sensitivity
      analysis:


1.
            Assets
                and liabilities are generally assigned to a period based upon their
                earliest repricing opportunity, when such repricing opportunity is
                before
                the contractual maturity.


2.
            Non-accrual
                loans are included in the loan
                category


3.
            Investment
                securities are scheduled for repricing based on their earliest repricing
                date; however, callable agency securities are only considered repriced
                at
                the call date if the security is at a market value above par
                value.


21


Liquidity
      and Capital Resources





Our
      primary sources of liquidity are
      deposit balances, available-for-sale securities, principal and interest payments
      on loans and investment securities, Fed Fund lines, and FHLB
      advances.





At
      December 31, 2006, we held $20.2
      million in available-for-sale securities. Deposits increased $25.5 million
      during 2006. We had $6.0 million in available federal funds lines and
      approximately $7.2 million in potentially available borrowings from the FHLB
      as
      of December 31, 2006.





We
      utilize various types of other
      borrowings to help fund balance sheet growth and mitigate our interest rate
      risk. The primary source of other borrowings is through the FHLB which has
      many
      different types of borrowing structures available to member banks. As of
      December 31, 2006 we had $12.5 million in outstanding advances with the FHLB.
      We
      had $2.5 million in fixed rate advances which offer fixed interest rates on
      balances that are due at maturity. We had $5.0 million in Convertible Fixed
      Rate
      Advances, which we refer to as “CFR,” outstanding. CFR advances offer fixed
      rates of interest for an initial term, then may convert, at the FHLB’s option to
      a floating rate. Due to the optionality of these advances, they do inherently
      carry more interest rate risk than fixed rate advances.   We also
      had $3.0 million in 5/1 putable advances and $1.0 million in 2/1 putable
      advances.  These instruments have fixed rates for a minimum of one
      year and a maximum of 2 or 5 years, respectfully.  We also have $1.0
      million in LIBOR advances which reprice to market rates every three months.
      We
      also maintain a Cash Management Advance, which we refer to as “CMA,” with the
      FHLB to meet short term liquidity needs. The CMA line of credit, which was
      established in 2001, is for amounts up to $8.0 million and expires annually.
      As
      of December 31, 2006 we did not have an outstanding balance under our CMA line
      of credit.





We
      can also enter into repurchase
      agreement transactions should the need for additional liquidity arise. At
      December 31, 2006, we had $303,000 in repurchase agreements
      outstanding.





At
      December 31, 2006, we had qualifying
      capital of $19.8 million, or 13.4% of total risk-based assets as compared to
      $13.3 million, or 10.1% at December 31, 2005. Tennessee chartered banks that
      are
      insured by the FDIC are subject to minimum capital maintenance requirements.
      Regulatory guidelines define the minimum amount of qualifying capital an
      institution must maintain as a percentage of risk-weighted assets and average
      total assets.





In
      March 2005, we formed Tennessee
      Valley Financial Statutory Trust I (“the Trust”). The Trust issued $2.0 million
      of trust preferred securities as part of a pooled offering of such securities.
      We issued $2.1 million subordinated debentures to the Trust in exchange for
      the
      proceeds of this offering, which debentures represent the sole asset of the
      Trust. The debentures pay interest quarterly at 6.75%. We may redeem the
      subordinated debentures, in whole or part, beginning June 2010 at a price of
      100% of face value. On this date, if the debentures are not redeemed, the
      interest converts to a variable rate due quarterly at the three-month LIBOR
      rate
      plus 2.00% adjusted quarterly. The subordinated debentures must be redeemed
      no
      later than 2035. We used the proceeds of this offering to support growth trends
      and future growth strategies.





The
      footnotes to the audited financial
      statements enclosed contain further discussion of regulatory capital
      requirements. For further information, please refer to Note 13 of those audited
      financial statements.





Impact
      of New Accounting Standards





In
      December
      2004 FASB issued SFAS No. 123(R) (revised 2004), “Share-Based Payment.” This
      Statement is a revision of SFAS No. 123, “Accounting for Stock-Based
      Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued
      to Employees,” and its related implementation guidance. SFAS No. 123(R)
      established standards for the accounting for transactions in which an entity
      exchanges its equity instruments for goods or services. This Statement requires
      that the cost resulting from all share-based payment transactions be recognized
      in the financial statements. This Statement establishes grant date fair value
      as
      the measurement objective in accounting for share-based payment arrangements
      and
      requires all entities to apply a fair-value-based measurement method in
      accounting for share-based payment transactions with employees, except for
      equity instruments held by employee stock ownership plans. The Company adopted
      SFAS No. 123(R) effective January 1, 2006, resulting in additional compensation
      expense of $72 for the year ended December 31, 2006.





22


In
      March
      2005, the SEC released Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based
      Payment”. SAB No. 107 expresses views of the SEC staff regarding the application
      of SFAS No. 123(R). Among other things, SAB No. 107 provides interpretive
      guidance related to the interaction between SFAS No. 123(R) and certain SEC
      rules and regulations and provides the staff’s view regarding the valuation of
      share-based payment arrangements for public companies. SAB No. 107 has been
      considered by the Company in its adoption of SFAS No. 123(R).





In
      May 2005,
      the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. This
      statement replaces APB Opinion No. 20, “Accounting Changes”, and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154
      changes the requirements for the accounting for and reporting of a voluntary
      change in accounting principle. SFAS No. 154 requires retrospective application
      to prior periods’ financial statements of changes in accounting principles or
      error corrections, unless it is impractical to determine the period-specific
      effects or when a pronouncement includes specific transition provisions. This
      statement is effective for accounting changes and corrections of error made
      in
      fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154
      did
      not have a material impact on the Company’s financial condition or results of
      operations of the Company.





In
      November
      2005 The FASB issued FASB Staff Position No. FAS 115-1 and FAS 124-1, “The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments” (the “FSP”). This FSP addresses the determination of when an
      investment is considered impaired; whether the impairment is other than
      temporary; and how to measure an impairment loss. The FSP also addresses
      accounting considerations subsequent to the recognition of an
      other-than-temporary impairment on a debt security, and requires certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. The FSP replaces the impairment guidance
      in
      EITF Issue No. 03-1 with references to existing authoritative literature
      concerning other-than-temporary determinations discussed in SFAS No. 115 and
      SEC
      Staff Accounting Bulletin 59. Under the FSP, impairment losses must be
      recognized in earnings equal to the entire difference between the security’s
      cost and its fair value at the financial statement date, without considering
      partial recoveries subsequent to that date. The FSP also requires that an
      investor recognize an other-than-temporary impairment loss when a decision
      to
      sell a security has been made and the investor does not expect the fair value
      of
      the security to fully recover prior to the expected time of sale. The FSP was
      effective for reporting periods beginning after December 15, 2005. The
      application of the FSP did not have a material impact on the Company’s financial
      condition or results of operations.





In
      July 2006,
      the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes, an interpretation of FASB Statement No. 109.” This interpretation
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes.” The interpretation prescribes a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax return.
      The
      interpretation also provides guidance on derecognition, classification, interest
      and penalties, accounting in interim periods, disclosure and transition. FASB
      Interpretation No. 48 is effective for fiscal years beginning after December
      31,
      2006. The Company is currently in the process of evaluating the impact of the
      implementation of FASB Interpretation No. 48.





In
      September
      2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which provides
      for enhanced guidance for using fair value to measure assets and liabilities.
      SFAS No. 157 defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles, and expands disclosures
      about
      fair value measurements. SFAS No. 157 is applicable under other accounting
      pronouncements that either require or permit fair value measurements and does
      not require any new fair value measurements. SFAS No. 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The Company has not yet evaluated
      the impact of the implementation of SFAS No. 157.





In
      September
      2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements.” SAB 108 provides interpretive guidance on how the effects of
      prior-year uncorrected misstatements should be considered when quantifying
      misstatements in the current year financial statements. SAB 108 requires
      registrants to quantify misstatements using both an income statement and balance
      sheet approach and evaluate whether either approach results in a misstatement
      that, when all relevant quantitative and qualitative factors are considered,
      is
      material. If prior year errors that had been previously considered immaterial
      now are considered material based on either approach, no restatement is required
      so long as management properly applied its previous approach and all relevant
      facts and circumstances were considered.





23


If
      prior
      years are not restated, the cumulative effect adjustment is recorded in opening
      accumulated earnings as of the beginning of the fiscal year of adoption. SAB
      108
      is effective for fiscal years ending on or after November 15, 2006. The
      application of SAB 108 did not have a material impact on the Company’s financial
      condition or results of operations.








ITEM
      7.   FINANCIAL STATEMENTS





Index
      to Financial Statements





Report
      of
      Independent Registered Public Accounting Firm                           
      26


Report
      of Independent Registered Public Accounting
      Firm                
      27


Consolidated
      Balance Sheets as of December 31, 2006 and 2005                  
       28


Consolidated
      Statements of Income for the Years ended December 31, 2006 and 2005          
      29


Consolidated
      Statements of Comprehensive Income for the Years ended December 31, 2006 and
      2005                               30


Consolidated
      Statements of Changes in Shareholders’ Equity for the Years ended December 31,
      2006 and
      2005              
31


Consolidated
      Statements of Cash Flows for the Years ended December 31, 2006 and
      2005                                                   
32


Notes
      to
      Consolidated Financial
      Statements                                                                                                                                   34


24


DIXON
      HUGHES


Certified
      Public Accountants and
      Advisors











REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








Board
      of
      Directors and the Shareholders


Tennessee
      Valley Financial Holdings, Inc.





We
      have
      audited the accompanying consolidated balance sheet of Tennessee Valley
      Financial Holdings, Inc. and subsidiary (the “Company”) as of December 31, 2006,
      and the related statements of income, comprehensive income, changes in
      shareholders’ equity and cash flows for the year then ended. These consolidated
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audit.





We
      conducted our audit 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. We were not engaged to perform
      an
      audit of the Company’s internal control over financial reporting.  Our
      audit included consideration of internal control over financial reporting as
      a
      basis for designing audit procedures that are appropriate in the circumstances,
      but not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting.  Accordingly, we
      express no such opinion.  An audit also includes examining, on a test
      basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, as well as evaluating the overall financial statement
      presentation.  We believe that our audit provides 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 Tennessee Valley Financial
      Holdings, Inc. and subsidiary as of December 31, 2006, and the results of their
      operations and their cash flows for the year then ended in conformity with
      accounting principles generally accepted in the United States of
      America.





/s/
      Dixon Hughes PLLC





Asheville,
      North Carolina


April
      2,
      2007



























































25




Report
      of Independent Registered Public Accounting Firm




Board
      of Directors and the
      Shareholders


Tennessee
      Valley Financial
      Holdings, Inc.




We
      have audited the
      accompanying consolidated balance sheet of Tennessee Valley Financial Holdings,
      Inc. and subsidiary (the "Company") as of December 31, 2005, and the related
      statements of income, comprehensive income, changes in shareholders' equity
      and
      cash flows for the year then ended.  These consolidated financial
      statements are the responsibility of the Company's management.  Our
      responsibility is to express an opinion on these financial statements based
      on
      our audit.




We
      conducted our audit 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 also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation.  We believe that our audit provides 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 Tennessee Valley Financial
      Holdings, Inc. and subsidiary as of December 31, 2005, and the results of their
      operations and their cash flows for the year then ended in conformity with
      accounting principles generally accepted in the United States of
      America.




/s/
      Pugh & Company,
      P.C.




Knoxville,
      Tennessee


January
      27,
      2006


26
  TENNESSEE
        VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 Consolidated
        Balance Sheets
 As
        of
        December 31, 2006 and 2005
 (amounts
          in thousands, except share and per-share data)
    
 2006
              
              
              2005AssetsCash
                and due
                from banks
              
              $
              3,226
              
              
              $
              3,414Federal
                funds
                sold
              
              
              11,941
              
              
              
              8,338Cash
                and cash
                equivalents
              
              
              15,167
              
              
              
              11,752Investment
                securities available for sale, at fair value
              
              
              20,156
              
              
              
              18,721Loans
                held for
                sale, at fair value
              
              
              788
              
              
              
              1,048Loans,
                net
              
              
              141,263
              
              
              
              108,346Federal
                Home
                Loan Bank stock, at cost
              
              
              634
              
              
              
              598Premises
                and
                equipment, net
              
              
              5,132
              
              
              
              5,008Accrued
                interest receivable
              
              
              1,119
              
              
              
              847Deferred
                income tax benefit
              
              
              278
              
              
              
              310Foreclosed
                real estate
              
              
              507
              
              
              
              -Prepaid
                expenses and other
              
              
              1,468
              
              
              
              331Total
                assets
              
              $
              186,512
              
              
              $
              146,961Liabilities
                and
                Shareholders’ EquityLiabilities:Deposits:Non-interest-bearing
              
              $
              13,944
              
              
              $
              11,864Interest-bearing
              
              
              139,408
              
              
              
              112,969Total deposits
              
              $
              153,352
              
              
              $
              124,833Borrowings
              
              
              15,060
              
              
              
              11,053Accrued
                interest payable
              
              
              1,245
              
              
              
              750Other
                liabilities
              
              
              355
              
              
              
              319Total
                liabilities
              
              
              170,012
              
              
              
              136,955Shareholders'
                equity:Common
                stock, par
                value $1, authorized 2,000,000 shares; issued and outstanding, 1,500,700
                and 538,985 shares at December 31, 2006 and 2005, respectively
              
              
              1,501
              
              
              
              539Capital
                in
                excess of par value
              
              
              11,319
              
              
              
              6,610Retained
                earnings
              
              
              3,750
              
              
              
              2,96816,570
              
              
              
              10,117Accumulated
                other comprehensive loss
              
              
              (70)
              
              
              
              (111)Total
                shareholders'
                equity
              
              
              16,500
              
              
              
              10,006Total
                liablilities and shareholders' equity
              
              $
              186,512
              
              
              $
              146,961
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
   27
  TENNESSEE
        VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 Consolidated
        Statements of Income
 For
        the
        Years Ended December 31, 2006 and 2005
 (amounts
          in thousands, except share and per-share data)
    2006
              
              
              2005Interest
                income:Loans
                (including fees)
              
              $
              10,341
              
              
              $
              7,883Investment
                securities
              
              
              860
              
              
              
              693Federal
                funds
                sold
              
              
              289
              
              
              
              201Total
                interest
                income
              
              
              11,490
              
              
              
              8,777Interest
                expense:Deposits
              
              
              4,559
              
              
              
              2,725Borrowings
              
              
              534
              
              
              
              464Total
                interest
                expense
              
              
              5,093
              
              
              
              3,189Net
                interest
                income
              
              
              6,397
              
              
              
              5,588Provision
                for
                loan losses
              
              
              471
              
              
              
              551Net
                interest
                income after provision for loan losses
              
              
              5,926
              
              
              
              5,037Non-interest
                income:Service
                charges on demand deposits
              
              
              422
              
              
              
              405Fees
                on loans
                sold
              
              
              386
              
              
              
              371Net
                gain on
                sales of investment securities available for sale
              
              
              23
              
              
              
              6Other
              
              
              167
              
              
              
              121Total
                non-interest income
              
              
              998
              
              
              
              903Non-interest
                expense:Salaries
                and
                employee benefits
              
              
              2,752
              
              
              
              2,173Occupancy
                costs
              
              
              802
              
              
              
              542Furniture
                and
                equipment depreciation and maintenance
              
              
              241
              
              
              
              217Data
                processing fees
              
              
              502
              
              
              
              393Office
                supplies and postage
              
              
              193
              
              
              
              180Advertising
                and promotion
              
              
              144
              
              
              
              125Legal
                and
                professional
              
              
              176
              
              
              
              123Director’s
                fees
              
              
              115
              
              
              
              117Loan
                expense
              
              
              366
              
              
              
              217Other
              
              
              493
              
              
              
              431Total
                non-interest expense
              
              
              5,784
              
              
              
              4,518Interest
                before income taxes
              
              
              1,140
              
              
              
              1,422Income
                taxes
              
              
              358
              
              
              
              487Net
                income
              
              $
              782
              
              
              $
              935Earnings
                per
                share:Basic
              
              $
              0.64
              
              
              $
              0.88Diluted
              
              $
              0.63
              
              
              $
              0.87
  
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  28
  
 TENNESSEE
          VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 Consolidated
          Statements of Comprehensive Income
 For
          the
          Years Ended December 31, 2006 and 2005
 (amounts
          in thousands, except share and per-share data)
   
 2006
              
              
              2005Net
                income
              
              $
              782
              
              
              $
              935Other
                comprehensive income (loss), net of tax:Unrealized
                gains (losses) on investment securities available for sale
              
              
              88
              
              
              
              (245
              )Reclassification
                adjustment for net gains included in net income
              
              
              (23
              )
              
              
              (6
              )Income
                taxes
                associated with realized and unrealized gains/losses oninvestment
                securities available for sale
              
              
              (24
              )
              
              
              93Other
                comprehensive income (loss), net of tax
              
              
              41
              
              
              
              (158
              )Comprehensive
                income
              
              $
              823
              
              
              $
              777
  
 
 
 
  29
  TENNESSEE
          VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 Consolidated
          Statements of Changes in Shareholders' Equity
 For
          the
          Years Ended December 31, 2006 and 2005
 (amounts
          in thousands, except share and per-share data)
 
 
 Common
                  Stock
                
                
                Capital
                    in
                  Excess
                    of
                  Par
                    Value
                
                
                Retained
                  Earnings
                
                
                Accumulated
                  Other
                  Comprehensive
                
                
                Total
                    Shareholders'
                  EquityBalance,
                  January 1, 2005
                
                $
                534
                
                
                $
                6,491
                
                
                $
                2,183
                
                
                $
                47
                
                
                $
                9,255Net
                  income
                
                
                --
                
                
                
                --
                
                
                
                935
                
                
                
                --
                
                
                
                935Other
                  comprehensive loss
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                (158
                )
                
                
                (158
                )Case
                  dividends
                  paid
                
                
                --
                
                
                
                --
                
                
                
                (82
                )
                
                
                --
                
                
                
                (82
                )Issuance
                    of
                    common stock for director's fees in lieu of
                  cash.
                
                
                1
                
                
                
                23
                
                
                
                --
                
                
                
                --
                
                
                
                24Stock
                    dividends issued through dividend
                  reinvestment plan
                
                
                2
                
                
                
                66
                
                
                
                (68)
                
                
                
                --
                
                
                
                --Common
                    stock
                    options exercised (2,020 shares at $16
                  per share)
                
                
                2
                
                
                
                30
                
                
                
                --
                
                
                
                --
                
                
                
                32Balance,
                  December 31, 2005
                
                
                539
                
                
                
                6,610
                
                
                
                2,968
                
                
                
                (111
                )
                
                
                10,006Net
                  income
                
                
                --
                
                
                
                --
                
                
                
                782
                
                
                
                --
                
                
                
                782Other
                  comprehensive loss
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                414
                
                
                
                41Stock
                  split (2
                  for 1)
                
                
                541
                
                
                
                (541
                )
                
                
                --
                
                
                
                --
                
                
                
                --Issuance
                    of
                    common stock for director's feesin lieu of
                  cash
                
                
                5
                
                
                
                94
                
                
                
                --
                
                
                
                --
                
                
                
                99Proceeds
                  from
                  common stock offering
                
                
                416
                
                
                
                5,078
                
                
                
                --
                
                
                
                --
                
                
                
                5,494Stock-based
                  compensation
                
                
                --
                
                
                
                72
                
                
                
                --
                
                
                
                --
                
                
                
                72Common
                    stock
                    options exercised (380 shares at$16
                  per share)
                
                
                --
                
                
                
                6
                
                
                
                --
                
                
                
                --
                
                
                
                6Balance,
                  December 31, 2006
                
                $
                1,501
                
                
                $
                11,319
                
                
                $
                3,750
                
                
                $
                (70)
                
                
                $
                16,500
  
 
 
  30
  TENNESSEE
          VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 Consolidated
          Statements of Cash Flows
 For
          the
          Years Ended December 31, 2006 and 2005
 (amounts
          in thousands, except share and per-share data)
  
 2006
              
              
              2005Cash
                flows from operating activities:Net
                income
              
              $
              782
              
              
              $
              935Adjustments
                  to reconcile net income to net cashprovided
                  by operatingactivities:Provision for loan losses
              
              
              471
              
              
              
              551Depreciation
              
              
              301
              
              
              
              240Deferred income tax benefit
              
              
              8
              
              
              
              52Increase (decrease) in unearned loan fees
              
              
              12
              
              
              
              (10
              )Net
                amortization of premiums and discounts oninvestment
                securities
              
              
              25
              
              
              
              40FHLB
                stock dividends
              
              
              (35
              )
              
              
              (27
              )Net
                gain on sales of investment securities available for sale
              
              
              (23
              )
              
              
              (6
              )Fees
                on
                loans sold
              
              
              (386
              )
              
              
              (371
              )Gain
                on
                sales of foreclosed real estate
              
              
              --
              
              
              
              24Stock
                based compensation
              
              
              172
              
              
              
              --Net
                (increase) decrease in:(Increase) decrease in loans held for sale
              
              
              646
              
              
              
              182(Increase) decrease in accrued interest receivable
              
              
              (272
              )
              
              
              (174
              )(Increase) decrease in prepaid expenses and other
              
              
              (160
              )
              
              
              (130
              )Net
                increase (decrease) in:Decrease in prepaid income taxes
              
              
              102
              
              
              
              (89
              )Decrease in accrued interest payable
              
              
              495
              
              
              
              395Increase (decrease) in accrued income taxes
              
              
              71
              
              
              
              --Increase in other liabilities
              
              
              (11
              )
              
              
              58Total adjustments
              
              
              1,416
              
              
              
              734Net cash provided by operating activities
              
              
              2,198
              
              
              
              1,669Cash
                flows
                from investing activities:Investment
                securities available for sale:Sales
              
              
              1,106
              
              
              
              4,270Purchases
              
              
              (6,089
              )
              
              
              (10,379
              )Maturities
              
              
              500
              
              
              
              --Principal repayments received
              
              
              3,111
              
              
              
              1,856Net
                increase in loans
              
              
              (33,907
              )
              
              
              (7,694
              )Proceeds from sales of loans
              
              
              (425
              )
              
              
              (1,079
              )Purchases of land for future development
              
              
              (1,104
              )
              
              
              --Proceeds from sales of foreclosed real estate
              
              
              --
              
              
              
              346Net cash provided by (used in) investing activities
              
              
              (36,808
              )
              
              
              (12,679
              )
 
   31
  TENNESSEE
          VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 Consolidated
          Statements of Cash Flows (Continued)
 For
          the
          Years Ended December 31, 2006 and 2005
 (amounts
          in thousands, except share and per-share data)
  
 2006
              
              
              2005Cash
                flows
                from financing activities:Net
                Increase (decrease) in deposits
              
              $
              28,519
              
              
              $
              20,034Net
                Increase in securities sold under agreements to repurchase
              
              
              30
              
              
              
              (80
              )Net
                Increase in federal funds purchased
              
              
              --
              
              
              
              (375
              )Net
                Increase in advances from Federal Home Loan Bank
              
              
              4,000
              
              
              
              (1,200
              )Decrease in obligation under capital lease
              
              
              (23
              )
              
              
              (22
              )Proceeds from subordinated debentures
              
              
              --
              
              
              
              2,062Cash
                dividends paid
              
              
              --
              
              
              
              (82
              )Proceeds from issuance of common stock
              
              
              5,499
              
              
              
              56Net cash provided by (used in) financing activities
              
              
              38,025
              
              
              
              20,393Net
                increase
                (decrease) in cash and cash equivalents
              
              
              3,415
              
              
              
              9,383Cash
                and cash
                equivalents at beginning of year
              
              
              11,752
              
              
              
              2,369Cash
                and cash
                equivalents at end of year
              
              $
              15,167
              
              
              $
              11,752Supplementary
                  disclosures of cash flow information:Cash
                paid
                during the year for:Interest
              
              $
              4,598
              
              
              $
              2,794Income
                taxes
              
              $
              314
              
              
              $
              515Supplementary
                disclosures of noncash investing and financing
                activities:Acquisition of foreclosed real estate
              
              $
              507
              
              
              $
              35Issuance of common stock through dividend reinvestment plan
              
              $
              0
              
              
              $
              68Change
                  in unrealized gain/loss on investment securitiesavailable for sale
              
              $
              65
              
              
              $
              (250
              )Change
                  in deferred taxes associated with unrealized gain/loss oninvestment securities available for sale
              
              $
              24
              
              
              $
              (93
              )Change
                  in net unrealized gain/loss on investment securities availablefor sale
              
              $
              41
              
              
              $
              (157
              )
  
     32
 TENNESSEE
                VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
 December
                  31, 2006 and 2005
 NOTE
        1 - PRINCIPLES OF CONSOLIDATION, NATURE OF OPERATIONS AND SHARE
        EXCHANGE
  The
        consolidated financial statements include the accounts of Tennessee Valley
        Financial Holdings, Inc. (the “Company”), a bank holding company, and its wholly
        owned subsidiary, TNBank (the “Bank”). All intercompany balances and
        transactions have been eliminated.




TNBank
      was incorporated on July 6, 1994 for the purpose of organizing a state-chartered
      commercial bank and commenced operations on May 30, 1995. TNBank provides a
      variety of banking services to individuals and businesses through its two
      offices in Oak Ridge and two offices in Knoxville, Tennessee. Its primary
      deposit products are demand deposits and certificates of deposit, and its
      primary lending products are commercial business, real estate mortgage, and
      consumer installment loans.





On
      May 9,
      2002, TNBank’s shareholders approved a share exchange agreement with Tennessee
      Valley Financial Holdings, Inc. whereby one share of Company stock was exchanged
      for one share of Bank stock. The Bank’s retained earnings as of May 9, 2002,
      totaling $1,243,010, were transferred to capital in excess of par value on
      a
      consolidated basis.








NOTE
      2 - SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES





Reclassifications
      - Certain
      items in the 2005 consolidated financial statements have been reclassified
      to
      conform with the 2006 consolidated financial statements.





Use
      of Estimates- The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect certain reported
      amounts and disclosures. Actual results could differ from those estimates.
      Material estimates that are particularly susceptible to significant change
      relate to the determination of the allowance for losses on loans and the fair
      value of financial instruments (see below).





Cash
      Flows –Cash and cash
      equivalents, includes cash, deposits with other financial institutions under
      90
      days, and federal funds sold. Net cash flows are reported for loan, deposit,
      and
      other borrowing transactions.





Securities
      Available for Sale– In accordance with SFAS No. 115, these securities are carried at fair
      value based on quoted market prices for securities that are marketable. These
      securities may be sold in response to changes in interest rates, liquidity
      needs, and for other purposes. Any unrealized gain or loss is reported in the
      statements of comprehensive income, net of any deferred tax effect.





Realized
      gains and losses on the sales of investment securities available for sale are
      based on the net proceeds and amortized cost of the securities sold, using
      the
      specific identification method. Declines in the fair value of securities below
      their cost that are other than temporary are reflected as realized
      losses.





Federal
      Home Loan Bank Stock, at Cost– The Bank, as a member of the Federal Home Loan Bank (“FHLB”) system, is
      required to maintain an investment in capital stock of the FHLB. The amount
      of
      the investment is in part based on the Bank’s amount of borrowings from the
      FHLB. The investment in FHLB stock is carried at cost which approximates fair
      value based on the stock redemption provisions of the FHLB.







33
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Recognition
      of Interest on
      Loans– Interest on loans is calculated using the simple interest method
      on the principal outstanding. Accrual of interest is discontinued on a loan
      when
      management believes, after considering economic and business conditions and
      collection efforts, that the borrower’s financial condition is such that
      collection of interest is doubtful.





Allowance
      for Loan Losses– The
      allowance for loan losses is maintained at a level which, in management’s
      judgment, is adequate to absorb credit losses inherent in the loan portfolio.
      The amount of the allowance is based on management’s evaluation of the
      collectibility of the loan portfolio, including the nature of the portfolio,
      credit concentrations, trends in historical loss experience, specific impaired
      loans, and economic conditions. Allowances for impaired loans are generally
      determined based on collateral values or the present value of estimated future
      cash flows. Because of uncertainties associated with regional economic
      conditions, collateral values, and future cash flows on impaired loans, it
      is
      reasonably possible that management’s estimate of credit losses inherent in the
      loan portfolio and the related allowance may change materially in the near
      term.
      The allowance is increased by a provision for loan losses, which is charged
      to
      expense and reduced by charge-offs, net of recoveries. Changes in the allowance
      relating to impaired loans are charged or credited to the provision for loan
      losses.





Loan
      Fees– Loan fees on
      long-term real estate loans, net of initial direct costs related to initiating
      and closing the loans, have been deferred and are being amortized into interest
      income over the remaining lives of the loans as an adjustment of yield using
      the
      interest method.





Loans
      Held for Sale– Loans
      held for sale are stated at book value, which approximates fair
      value.





Premises
      and Equipment–
Premises and equipment are stated at cost less accumulated depreciation.
      Depreciation is computed over the asset useful lives 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.





Repurchase
      Agreements–
Substantially all repurchase agreement liabilities represent amounts
      advanced by
      various customers.  Securities are pledged to cover these liabilities,
      which are not covered by federal deposit insurance.





Advertising
      and Promotion–
Advertising and promotion costs are expensed as incurred.





Income
      Taxes– Income taxes are
      provided for the tax effects of transactions reported in the consolidated
      financial statements and consist of taxes currently due plus deferred taxes
      related primarily to differences between the basis of the allowance for loan
      losses, accumulated depreciation, and other book income versus taxable income
      reporting differences. The deferred tax assets and liabilities, which are
      recorded net of a valuation allowance, represent the future tax return
      consequences of those differences which will either be taxable or deductible
      when the assets and liabilities are recovered or settled. See Note 10 for
      additional information.





34
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES  (Continued)





Stock-
      Based Compensation–
Effective January 1, 2006, the Company adopted Statement of Financial
      Accounting
      Standards No. 123(R) (revised 2004).  “Share-Based Payment,” (“SFAS
      No. 123R”) using the modified prospective method.  According to SFAS
      No. 123R, the total cost of the Company’s share based awards is equal to the
      grant date fair value and recognized as expense on a straight line basis over
      the service periods of the awards.  For the year ended December 31,
      2006 stock option expense of $72 was recorded in the income statement in net
      income.  There is no tax effect for this stock option expense because
      all of the options issued were Incentive Stock Options (“ISO’s”).  As
      of December 31, 2006, the Company had $41 of unrecognized stock option expense
      which will be recognized over 2 years.





As
      allowed under SFAS No. 123, the Company applied APB Opinion No. 25, “Accounting
      for Stock Issued to Employees”, and related interpretations in accounting for
      its stock option plans prior to January 2006.  Accordingly, no
      compensation expense was recognized for options granted with exercise prices
      equal to the fair market value of the Company’s common stock on the grant
      date.





The
      following illustrates the effect on net income available to common shareholders
      if the Company had applied the fair value recognition provisions of SFAS No.
      123
      to the year ended December 31, 2005:




For
                the year ended
              December
                31, 2005Net
              Income, as
              reported
            
            $
            935Less:Total
                stock-basedemployeecompensationexpensedeterminedunderfairvaluebasedmethod
                for allawards,
              netofrelatedtaxeffects
            
            
            (33
            )Pro
              forma net
              income
            
            $
            902Earnings
              per
              share:Basic
              - as
              reported
            
            $
            0.88Basic
              - pro
              forma
            
            $
            0.85Diluted
              - as
              reported
            
            $
            0.87Diluted
              - pro
              forma
            
            $
            0.84





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 Financial Accounting Standards Board (“FASB”)
      Interpretation No. 45. The fair value of these financial guarantees is not
      material.





Earnings
      Per Common
      Share– Basic earnings per
      common share are net income divided by the weighted average number of common
      shares outstanding during the period. Diluted earnings per common share includes
      the dilutive effect of additional potential common shares issuable under stock
      options.





35
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Comprehensive
      Income– Comprehensive income
      consists of net income and other comprehensive income. Other comprehensive
      income includes unrealized gains 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.





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. Management does not believe
      there are any such matters that will have a material effect on the financial
      statements.





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.





New
      Accounting Pronouncements– In December 2004 FASB issued SFAS No. 123(R) (revised 2004),
“Share-Based Payment.” This Statement is a revision of SFAS No. 123, “Accounting
      for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting
      for Stock Issued to Employees,” and its related implementation guidance. SFAS
      No. 123(R) established standards for the accounting for transactions in which
      an
      entity exchanges its equity instruments for goods or services. This Statement
      requires that the cost resulting from all share-based payment transactions
      be
      recognized in the financial statements. This Statement establishes grant date
      fair value as the measurement objective in accounting for share-based payment
      arrangements and requires all entities to apply a fair-value-based measurement
      method in accounting for share-based payment transactions with employees, except
      for equity instruments held by employee stock ownership plans. The Company
      adopted SFAS No. 123(R) effective January 1, 2006, resulting in additional
      compensation expense of $72 for the year ended December 31, 2006.





In
      March
      2005, the SEC released Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based
      Payment”. SAB No. 107 expresses views of the SEC staff regarding the application
      of SFAS No. 123(R). Among other things, SAB No. 107 provides interpretive
      guidance related to the interaction between SFAS No. 123(R) and certain SEC
      rules and regulations and provides the staff’s view regarding the valuation of
      share-based payment arrangements for public companies. SAB No. 107 has been
      considered by the Company in its adoption of SFAS No. 123(R).





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”.
      This statement replaces APB Opinion No. 20, “Accounting Changes”, and SFAS No.
      3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154
      changes the requirements for the accounting for and reporting of a voluntary
      change in accounting principle. SFAS No. 154 requires retrospective application
      to prior periods’ financial statements of changes in accounting principles or
      error corrections, unless it is impractical to determine the period-specific
      effects or when a pronouncement includes specific transition provisions. This
      statement is effective for accounting changes and corrections of error made
      in
      fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154
      did
      not have a material impact on the Company’s financial condition or results of
      operations of the Company.





36
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





In
      November 2005 The FASB issued FASB Staff Position No. FAS 115-1 and FAS 124-1,
      “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments” (the “FSP”). This FSP addresses the determination of when an
      investment is considered impaired; whether the impairment is other than
      temporary; and how to measure an impairment loss. The FSP also addresses
      accounting considerations subsequent to the recognition of an
      other-than-temporary impairment on a debt security, and requires certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. The FSP replaces the impairment guidance
      in
      EITF Issue No. 03-1 with references to existing authoritative literature
      concerning other-than-temporary determinations discussed in SFAS No. 115 and
      SEC
      Staff Accounting Bulletin 59. Under the FSP, impairment losses must be
      recognized in earnings equal to the entire difference between the security’s
      cost and its fair value at the financial statement date, without considering
      partial recoveries subsequent to that date. The FSP also requires that an
      investor recognize an other-than-temporary impairment loss when a decision
      to
      sell a security has been made and the investor does not expect the fair value
      of
      the security to fully recover prior to the expected time of sale. The FSP was
      effective for reporting periods beginning after December 15, 2005. The
      application of the FSP did not have a material impact on the Company’s financial
      condition or results of operations.





In
      July
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement No. 109.” This interpretation
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes.” The interpretation prescribes a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax return.
      The
      interpretation also provides guidance on derecognition, classification, interest
      and penalties, accounting in interim periods, disclosure and transition. FASB
      Interpretation No. 48 is effective for fiscal years beginning after December
      31,
      2006. The Company is currently in the process of evaluating the impact of the
      implementation of FASB Interpretation No. 48.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
      provides for enhanced guidance for using fair value to measure assets and
      liabilities. SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles, and expands
      disclosures about fair value measurements. SFAS No. 157 is applicable under
      other accounting pronouncements that either require or permit fair value
      measurements and does not require any new fair value measurements. SFAS No.
      157
      is effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The Company
      has not yet evaluated the impact of the implementation of SFAS No.
      157.





In
      September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements.” SAB 108 provides interpretive guidance on how the effects of
      prior-year uncorrected misstatements should be considered when quantifying
      misstatements in the current year financial statements. SAB 108 requires
      registrants to quantify misstatements using both an income statement and balance
      sheet approach and evaluate whether either approach results in a misstatement
      that, when all relevant quantitative and qualitative factors are considered,
      is
      material. If prior year errors that had been previously considered immaterial
      now are considered material based on either approach, no restatement is required
      so long as management properly applied its previous approach and all relevant
      facts and circumstances were considered.


37
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





If
      prior
      years are not restated, the cumulative effect adjustment is recorded in opening
      accumulated earnings as of the beginning of the fiscal year of adoption. SAB
      108
      is effective for fiscal years ending on or after November 15, 2006. The
      application of SAB 108 did not have a material impact on the Company’s financial
      condition or results of operations.








NOTE
      3 – SECURITIES





The
      amortized cost and estimated fair value of securities are as
      follows:





Securities
                Available for SaleGross
            
            
            GrossAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            EstimatedCost
            
            
            Gains
            
            
            Losses
            
            
            Fair
                ValueDecember
              31, 2006Obligations
                of U.S. government corporationsand
                agencies
            
            $
            6,709
            
            
            $
            7
            
            
            $
            (64
            )
            
            $
            6,648Mortgage-backed
                and related securities
            
            
            6,596
            
            
            
            14
            
            
            
            (89
            )
            
            
            6,524Obligations
                of states and political subdivisions
            
            
            6,961
            
            
            
            54
            
            
            
            (32
            )
            
            
            6,984Total
                securities available for sale
            
            $
            20,266
            
            
            $
            75
            
            
            $
            (185
            )
            
            $
            20,156





Securities
                Available for SaleGross
            
            
            GrossAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            EstimatedCost
            
            
            Gains
            
            
            Losses
            
            
            Fair
                ValueDecember
              31, 2005Obligations
                of U.S. government corporationsand
                agencies
            
            $
            6,263
            
            
            $
            3
            
            
            $
            (116
            )
            
            $
            6,150Mortgage-backed
                and related securities
            
            
            5,876
            
            
            
            14
            
            
            
            (66
            )
            
            
            5,824Obligations
                of states and political subdivisions
            
            
            6,758
            
            
            
            63
            
            
            
            (74
            )
            
            
            6,747Total
                securities available for sale
            
            $
            18,897
            
            
            $
            80
            
            
            $
            (256
            )
            
            $
            18,721





The
      amortized cost and estimated fair value of debt securities as of December 31,
      2006, by contractual maturity, are as follows:









Securities
                Available
                for SaleAmortized
              Cost
            
            
            Estimated
              Fair ValueDue
              in one
              year or less
            
            $
            1,350
            
            
            $
            1,344Due
              after one
              year through five years
            
            
            4,503
            
            
            
            4,464Due
              after five
              years through ten years
            
            
            3,022
            
            
            
            3,025Due
              after ten
              years
            
            
            4,795
            
            
            
            4,79813,670
            
            
            
            13,631Mortgage-backed
              and
              related securities
            
            
            6,596
            
            
            
            6,525$
            20,266
            
            
            $
            20,156






Expected
      maturities can differ from contractual maturities because issuers may have
      the
      right to call or prepay obligations with or without call or prepayment
      penalties.





Proceeds
      from sales of securities classified as available for sale totaled $1,106 during
      the year ended December 31, 2006 ($4,270 in 2005). Gross gains of $23 ($22
      in 2005) and gross losses of $0 ($16 in 2005) were realized by the Bank during
      the year ended December 31, 2006.





Debt
      securities with a total estimated fair value (which approximates book value)
      of
      approximately $8,058 as of December 31, 2006 ($8,641 in 2005) were pledged
      to secure deposits of public and private funds.





38
 TENNESSEE
                  VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS
 December
                    31, 2006 and 2005


The
      following table shows the Bank’s investments’ gross unrealized losses and fair
      value, aggregated by investment category and length of time that individual
      securities have been in a continuous loss position, as of December 31, 2006
      and
      2005.





Less
                Than 12
                Months
            
            
            12
                Months or
                More
            
            
            TotalFair
              Value
            
            
            Gross
              Unrealized
              losses
            
            
            Fair
              Value
            
            
            Gross
              Unrealized
              losses
            
            
            Fair
              Value
            
            
            Gross
              Unrealized
              lossesDecember
              31, 2006:Obligations
                of U.S.
                government
              corporation and agencies
            
            $
            1,250
            
            
            $
            (2
            )
            
            $
            4,945
            
            
            $
            (62
            )
            
            $
            5,940
            
            
            $
            (64
            )Mortgage-backed
                and
                related
              securities
            
            
            1,451
            
            
            
            (13
            )
            
            
            3,767
            
            
            
            (76
            )
            
            
            5,218
            
            
            
            (89
            )Obligations
                of
                states and political
              subdivisions
            
            
            758
            
            
            
            (11
            )
            
            
            2,051
            
            
            
            (21
            )
            
            
            2,809
            
            
            
            (32
            )Total
              temporarily
              impaired securities
            
            $
            3,459
            
            
            $
            (26)
            
            
            $
            10,763
            
            
            $
            (159)
            
            
            $
            13,967
            
            
            $
            (185)December
              31,
              2005:Obligations
                of U.S.
                government
              corporation and
                agencies
            
            $
            4,424
            
            
            
            (
              74)
            
            
            $
            1,536
            
            
            
            (42)
            
            
            $
            5,960
            
            
            $
            (116)Mortage-backed
              and
              related securities
            
            
            3,271
            
            
            
            (28)
            
            
            
            1,270
            
            
            
            (39)
            
            
            
            4,542
            
            
            
            (66)Obligations
                of
                states and political
              subdivision
            
            
            2,672
            
            
            
            (57)
            
            
            
            852
            
            
            
            (16)
            
            
            
            3,523
            
            
            
            (74)Total
              temporarily imparied securities
            
            $
            10,367
            
            
            $
            (159)
            
            
            $
            3,658
            
            
            $
            (97)
            
            
            $
            14,025
            
            
            $
            (256)







Management
      evaluates securities for other-than-temporary impairment at least on a quarterly
      basis, and more frequently when economic or market concerns warrant such
      evaluation. Consideration is given to (1) the length of time and the extent
      to
      which the fair value has been less than cost, (2) the financial condition and
      near-term prospects of the issuer, and (3) the intent and ability of the Bank
      to
      retain its investment in the issuer for a period of time sufficient to allow
      for
      any anticipated recovery in fair value.





At
      December 31, 2006, the 34 debt securities with unrealized losses have
      depreciated 1.1% from the Bank’s amortized cost basis. These securities are
      guaranteed by either the U.S. Government corporations and agencies or other
      local governments. These unrealized losses relate principally to current
      interest rates for similar types of securities. In analyzing an issuer’s
      financial condition, management considers whether the securities are issued
      by
      the federal government or its agencies, whether downgrades by bond rating
      agencies have occurred, and the results of reviews of the issuer’s financial
      condition. As management has the ability to hold debt securities for the
      foreseeable future, no declines are deemed to be
      other-than-temporary.


39
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      4 – LOANS AND ALLOWANCE FOR LOAN
      LOSSES





The
      Bank
      provides mortgage, commercial, and consumer lending services to businesses
      and
      individuals primarily in the Anderson, Knox, Blount, and Roane County areas.
      A
      summary of loans as of December 31, 2006 and 2005 is as
      follows:







Loans
              secured
              by real estate:
            
            2006
            
            
            2005Commercial
              properties
            
            $
            15,788
            
            
            
            15,209Construction and land development
            
            
            36,561
            
            
            
            25,610Residential and other properties
            
            
            41,444
            
            
            
            36,143Total loans secured by real estate
            
            
            93,793
            
            
            
            76,962Commercial and industrial loans
            
            
            23,308
            
            
            
            18,510Consumer loans and other
            
            
            25,879
            
            
            
            14,407142,980
            
            
            
            109,879Less: 
              Allowance for loan losses
            
            
            (1,577
            )
            
            
            (1,406
            )Unearned loan fees
            
            
            (140
            )
            
            
            (127
            )$
            141,263
            
            
            $
            108,346





Included
      in consumer loans and other shown above are deposit account balances totaling
      approximately $327 which were in overdraft status as of December 31, 2006 ($165
      in 2005).





Loans
      held for sale represent individual real estate loans originated for the purpose
      of selling the loans to one of several third party purchasers with which the
      Bank does business. These loans are sold without recourse and the Bank receives
      certain fees for originating the loans.





In
      the
      ordinary course of business, the Bank has entered into off-balance-sheet
      financial instruments consisting of commitments to extend credit, commercial
      letters of credit, and standby letters of credit. These financial instruments
      are recorded in the financial statements when they are funded. Outstanding
      letters of credit were approximately $1,616 as of December 31, 2006 ($1,475
      as
      of December 31, 2005). Unadvanced lines of credit and commitments to extend
      credit were approximately $34,309 as of December 31, 2006 ($33,637 as of
      December 31, 2005). Of the total outstanding letters of credit and unadvanced
      lines and commitments as of December 31, 2006, approximately $28,169 were
      secured, primarily by real estate ($28,708 in 2005).




From
        time
        to time, the Bank provides credit to its executive officers, directors, and
        their affiliates. Such transactions are made on the same terms as those
        prevailing for comparable transactions with other borrowers and do not represent
        more than a normal risk of collection. Loans to executive officers, directors,
        and their affiliates are as follows:




2006
            
            
            2005Loans
              at
              beginning of year
            
            $
            1,092
            
            
            $
            1,484Disbursements
            
            
            493
            
            
            
            811Repayments
            
            
            (1,304
            )
            
            
            (1,203
            )Loans
              at end
              of year
            
            $
            281
            
            
            $
            1,092















40
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      4 – LOANS AND ALLOWANCE FOR LOAN
      LOSSES (Continued)





The
      transactions in the allowance for loan losses are as follows:




2006
            
            
            2005Balance,
              beginning of year
            
            $
            1,406
            
            
            $
            1,271Charge-offs
            
            
            (341
            )
            
            
            (447
            )Recoveries
            
            
            41
            
            
            
            31Provision-charged
              to expense
            
            $
            471
            
            
            $
            551Balance,
              end
              of year
            
            $
            1,577
            
            
            $
            1,406





The
      Bank
      had approximately $19 in 2006 ($185 in 2005) of loans past due ninety days
      or
      more and still accruing interest, and approximately $285 in loans on which
      the
      accrual of interest had been discontinued as of December 31, 2006 ($282 in
      2005).





As
      of
      December 31, 2006, the Bank had approximately $326 in loans specifically
      classified as impaired ($848 in 2005). The allowance for loan losses related
      to
      impaired loans amounted to approximately $54 as of December 31, 2006 ($191,000
      in 2005).




NOTE
      5 – PREMISES AND EQUIPMENT





A
      summary
      of premises and equipment is as follows:




2006
              
              
              2005Land
              
              $
              1,198
              
              
              $
              1,
                198Buildings
              
              
              3,461
              
              
              
              3,470Leasehold
                improvements
              
              
              123
              
              
              
              123Furniture,
                fixtures, and equipment
              
              
              1,575
              
              
              
              1,336Construction
                in progress
              
              
              196
              
              
              
              06,553
              
              
              
              6,127Less
                accumulated depreciation
              
              
              (1,421
              )
              
              
              (1,119
              )$
              5,132
              
              
              $
              5,008





Included
      in Buildings above is $776 for the capitalized costs of leases for branches
      considered an asset under capital lease (see Note 14). In addition, related
      leasehold improvements of the branches totaled $123. Depreciation expense
      related to the assets under capital leases was $39 in 2006 ($38 in
      2005).




NOTE
      6 – ACCRUED INTEREST RECEIVABLE





A
      summary
      of accrued interest receivable is as follows:







2006
            
            
            2005Securities
            
            $
            171
            
            
            $
            169Loans
            
            
            948
            
            
            
            678Total
            
            $
            1,119
            
            
            $
            847





41


Note
      7 – Deposits





A
      summary
      of deposits is as follows:




2006
            
            
            2005Noninterest-bearing
              demand accounts
            
            $
            13,944
            
            
            $
            11,864Intrest-bearing
              accountsDemand
              accounts
            
            
            37,191
            
            
            
            42,064Savings
              accounts
            
            
            3,729
            
            
            
            3,323Term
                deposits:Less
              than
              $100,000
            
            
            56,555
            
            
            
            41,660$100,000
              or
              more
            
            
            41,933
            
            
            
            25,922Total
              interest-bearing accounts
            
            
            139,408
            
            
            
            112,969Total
              deposits
            
            $
            153,352
            
            
            $
            124,833





As
      of
      December 31, 2006, the scheduled maturities of term deposits are as
      follows:







2007
            $86,6212008
            6,4632009
            1,6942010
            2,5092011
                and
                thereafter
            1,200$98,487





The
      aggregate amount of deposits of executive officers and directors of The Company
      and their related interests was approximately $3.6 million at year-end 2006
      .








NOTE
      8 – BORROWINGS





Securities
      Sold Under
      Agreements to Repurchase





The
      Bank
      sells certain investment securities with agreements to repurchase primarily
      on
      an overnight basis to certain commercial depositors. The total of these
      securities was $303 as of December 31, 2006 ($273 in 2005).





Securities
      sold under agreements to repurchase averaged approximately $359 during 2006
      ($389 during 2005). The maximum amount outstanding at any month-end during
      2006
      was approximately $409 ($491 during 2005).





Federal
      Funds
      Purchased





The
      Bank
      maintains a federal funds line of credit with three of its correspondent
      commercial banks. These lines allow for total borrowings up to a maximum amount
      of $6,000. Advances are repaid on the next business day with interest. There
      were no borrowings outstanding on these lines at December 31,
      2006.


42


NOTE
      8 – BORROWINGS (Continued)





Advances
      from Federal Home
      Loan Bank





The
      following table is a maturity schedule of advances from Federal Home Loan Bank
      (“FHLB”) as of December 31, 2006:







Date
                of
                Advance
            Interest
                Rate
            Next
                Call/
              Prepayment
              Date
            Final
              Maturity Date
            Amount
                Outstanding
              at
                12/31/20069/21/2000
            6.22%
            3/22/07
            9/22/2010
            $
              1,00012/27/2000
            5.00%
            3/27/07
            12/27/2010
            1,0008/10/2001
            5.09%
            2/10/07
            8/10/2011
            1,0006/25/2002
            4.82%
            None
            6/25/2007
            5008/30/2002
            3.65%
            8/30/07
            8/30/2012
            2,00011/15/2005
            5.38%
            2/15/07
            8/15/2011
            1,0009/20/2006
            5.30%
            None
            12/19/2008
            5009/20/2006
            5.24%
            None
            9/18/2009
            5009/20/2006
            5.45%
            None
            9/20/2007
            5009/20/2006
            5.31%
            None
            6/20/2008
            50011/28/2006
            4.39%
            11/30/07
            11/31/2011
            3,00012/04/2006
            4.90%
            12/4/07
            12/4/2008
            1,000$12,500








Interest
      expense associated with the advances from the FHLB totaled $384 for the year
      ended December 31, 2006 ($352 in 2005). Pursuant to collateral agreements with
      the FHLB, the advances are secured by the Bank’s FHLB stock, certain first
      mortgage loans, and certain home equity lines of credit. The Bank also maintains
      a Cash Management Advance (CMA) agreement with the FHLB with maximum borrowings
      of $8,000.





Subordinated
      Debentures





In
      March
      2005, the Company formed Tennessee Valley Statutory Trust I (“the Trust”). The
      Trust is a statutory business trust formed under the laws of the state of
      Delaware and is wholly owned by the Company. The Trust issued $2,000 of trust
      preferred securities as part of a pooled offering of such securities. The
      Company then issued $2,062 subordinated debentures to the Trust in exchange
      for
      the proceeds of the offering, which debentures represent the sole asset of
      the
      Trust. The debentures pay interest quarterly at 6.75%. The Company may redeem
      the subordinated debentures, in whole or part, beginning June 2010 at a price
      of
      100% of face value. On this date, if the debentures are not redeemed, the
      interest converts to a variable rate due quarterly at the three-month LIBOR
      rate
      plus 2.00% adjusted quarterly. The subordinated debentures must be redeemed
      no
      later than 2035.





In
      accordance with FASB Interpretation No. 46 (as revised), the Trust is not
      consolidated with the Company. Accordingly, the Company reports as liabilities
      the subordinated debentures issued by the Company and held by the Trust.
      However, the Company has fully and unconditionally guaranteed the repayment
      of
      the trust preferred securities. The Company’s equity interest in the Trust ($62
      as of December 31, 2006) is included in “Prepaid Expenses and Other” on the
      consolidated balance sheets.





The
      Company utilizes its borrowings to satisfy a portion of its Tier 1 capital
      requirement in accordance with regulations promulgated by the Federal Reserve
      Board.


43
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      8 – BORROWINGS (Continued)





Obligation
      Under Capital
      Lease





The
      present value of the Bank’s minimum lease payments under capital lease was $195
      at December 31, 2006 ($217 at December 31, 2005). See Note 14.








NOTE
      9 - INTEREST EXPENSE





A
      summary
      of interest expense is as follows:








2006
            
            
            2005Demand
                deposits
            
            $
            881
            
            
            $
            671Term
              deposits
            
            
            3,678
            
            
            
            2,054FHLB
                advances
            
            
            384
            
            
            
            352Subordinated
                debentures
            
            
            135
            
            
            
            95Capital
                lease
                obligations
            
            
            7
            
            
            
            8Repurchase
                agreements and federal funds purchased
            
            
            8
            
            
            
            9Total interest expense
            
            $
            5,093
            
            
            $
            3,189





NOTE
      10 - INCOME TAXES





Income
      taxes as shown in the statements of income differ from the amounts computed
      using the statutory federal income tax rate as follows:








2006
            
            
            2005Amount
            
            
            Percent
                of
              Pretax
              Income
            
            
            Amount
            
            
            Percent
                of
              Pretax
              IncomeFederal
              income
              tax at statutory rate
            
            $
            388
            
            
            
            34.0
            %
            
            $
            483
            
            
            
            34.0
            %Tax
              exempt
              interest and dividents
            
            
            (91
            )
            
            
            (8.0
            )
            
            
            (79
            )
            
            
            (5.5
            )State
              income
              tax and other, net
            
            
            61
            
            
            
            5.4
            
            
            
            83
            
            
            
            5.8$
            358
            
            
            
            31.4
            %
            
            $
            487
            
            
            
            34.3
            %Income
              taxes
              consist of:Current federal
            
            $
            286
            
            
            
            
            
            
            $
            348Current state
            
            
            64
            
            
            
            
            
            
            
            87Deferred federal
            
            
            6
            
            
            
            
            
            
            
            42Deferred state
            
            
            2
            
            
            
            
            
            
            
            10$
            358
            
            
            
            
            
            
            $
            487


44
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      10 - INCOME TAXES (Continued)





The
      tax
      effect of each type of temporary difference and carryfoward that give rise
      to
      deferred tax assets and liabilities is as follows:






2006
            
            
            2005Deferred
              tax
              assets:Allowance for loan losses
            
            $
            506
            
            
            $
            467Deferred Loan Fees
            
            
            57
            
            
            
            52Unrealized holding losses on securities available for sale
            
            
            43
            
            
            
            65Organizational costs
            
            
            1
            
            
            
            5Total deferred tax assets
            
            
            607
            
            
            
            589Deferred
              tax
              liabilitiesDepreciation
            
            
            166
            
            
            
            152FHLB
              stock dividends
            
            
            77
            
            
            
            62Discount accretion
            
            
            20
            
            
            
            12Capitalized lease
            
            
            32
            
            
            
            23Prepaid
              items
            
            
            20
            
            
            
            15State
              tax
            
            
            14
            
            
            
            15Total
              deferred tax liabilities
            
            
            329
            
            
            
            279Net deferred tax assets
            
            $
            278
            
            
            $
            310








NOTE
      11 - PROFIT SHARING PLAN





The
      Bank
      has a profit sharing plan which allows employees to contribute up to the maximum
      amount allowed under the IRS code. Contributions to the profit sharing plan
      made
      by the Bank are determined annually at the discretion of the Bank’s board of
      directors. Bank contributions to the plan were $35 and $31 for the years ended
      December 31, 2006 and 2005, respectively.








NOTE
      12 - REGULATORY MATTERS





The
      Bank
      is subject to various regulatory capital requirements administered by the
      federal and state banking agencies. Failure to meet minimum capital requirements
      can initiate certain mandatory, and possibly additional discretionary, actions
      by regulators that, if undertaken, could have a direct material effect on the
      Bank's financial statements. Under capital adequacy guidelines and the
      regulatory framework for prompt corrective action, the Bank must meet specific
      capital guidelines that involve quantitative measures of the Bank's assets,
      liabilities, and certain off-balance-sheet items as calculated under regulatory
      accounting practices. The Bank's capital amounts and classification are also
      subject to qualitative judgments by the regulators about components, risk
      weightings, and other factors.





45
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      12 - REGULATORY MATTERS (Continued)





Quantitative
      measures established by regulation to ensure capital adequacy require the Bank
      to maintain minimum amounts and ratios (set forth in the table below) of Total
      and Tier I capital (as defined in the regulations) to Risk-Weighted Assets
      (as
      defined), and of Tier I capital (as defined) to Average Assets (as defined).
      Management believes, as of December 31, 2006, that the Bank meets all
      capital adequacy requirements to which it is subject.







As
      of
      December 31, 2006, the Bank is categorized as well capitalized under the
      regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank
      must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
      ratios as set forth in the table. There are no conditions or events since that
      date that management believes have changed the institution's
      category.





The
      Bank's actual capital amounts and ratios are also presented in the table. All
      amounts are in thousands of dollars.






Actual
            To
                Comply
                With
              Absolute
              Minimum Capital
              Requirements
            To
                Be Well
                Capitalized
              Under Prompt
                Corrective
              Action
                ProvisionsAmount
            Ratio
            Amount
            Ratio
            Amount
            RatioAs
              of December
              31, 2006Total
              Capital
              (to Risk-Weighted Assets)
            $19,784
            13.4%
            $11,807
            8.0%
            $14,759
            10.0%Tier
              1 Capital
              (to Risk-Weighted Assets)
            $18,207
            12.3%
            $5,903
            4.0%
            $8,855
            6.0%Tier
              1 Capital
              (to Average Assets)
            $18,207
            10.1%
            7,233
            4.0%
            $9,042
            5.0%As
              of December
              31, 2005Total
              Capital
              (to Risk-Weighted Assets)
            $13,340
            11.9%
            9,005
            8.0%
            $11,256
            10.0%Tier
              1 Capital
              (to Risk-Weighted Assets)
            $9,060
            10.6%
            4,502
            4.0%
            $6,754
            6.0%Tier
              1 Capital
              (to Average Assets)
            $9,060
            8.4%
            5,691
            4.0%
            $7,114
            5.0%








NOTE
      13 - STOCK BASED COMPENSATION





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





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


46
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      13 - STOCK BASED COMPENSATION (Continued)





Prior
      to
      the adoption of SFAS No. 123R, the Company used the intrinsic value method
      as
      prescribed by APB No. 25 and thus recognized no compensation expense for options
      granted with exercise prices equal to the fair market value of the Company's
      common stock on the date of grant.




In
      1996,
      the board of directors approved a stock option plan to provide key employees
      with additional incentive to contribute to the best interests of the Company.
      The board of directors has discretion concerning which eligible persons shall
      be
      granted options, the term of each granted option, and the number of shares
      for
      which each option shall be granted. Options must be exercised within ten years
      from the date they are granted and must include a price per share of at least
      85% to 110% of the fair value of the Company's common stock on the date the
      option is granted. The board of directors reserved 38,950 shares of common
      stock
      for issuance during the term of the plan. All options have been awarded under
      the plan. The options awarded vest over a four-year period and have an exercise
      price which was equal to the fair value of the stock on the date the options
      were granted. In 2006, options for 380 (760 shares adjusted for 2-for-1 stock
      split) shares were exercised (options for 380 shares (760 shares adjusted for
      2-for-1 stock split) were exercised [options for 2,120 shares (4,240 adjusted
      for 2-for-1 stock split) have been exercised in total in prior
      years].




In
      2002,
      the board of directors approved an additional stock option plan to provide
      key
      employees with additional incentive to contribute to the best interests of
      the
      Company. The plan terminates in ten years. The board of directors also has
      discretion concerning which eligible persons shall be granted options, the
      term
      of each granted option, and the number of shares for which each option shall
      be
      granted. Options must be exercised within ten years from the date they are
      granted and must include a price per share of at least 100% of the fair value
      of
      the Company's common stock on the date the option is granted. The board of
      directors has limited the number of options that can be issued under this plan
      to the lesser of 20% of the shares outstanding or 427,224 shares of common
      stock
      for issuance during the term of the plan. In 2005, the board of directors
      awarded a total of 78,750 options at an exercise price of $13, which was equal
      to the fair value of the stock on the date the options were granted. These
      options vest over a four-year period. No options have been exercised under
      this
      plan.




The
      fair value of each option granted is estimated on the date of grant using the
      Black-Scholes option-pricing model as follows:







Years
              ended December 31,2006
            2005Dividend
              yield
            1.37%
            1.37%Expected
              life
            9
              years
            9
              yearsExpected
              volatility
            13.65%
            13.65%Risk-free
              interest rate
            4.24%
            4.01%




A
      summary
      of the status of the Company’s stock option plans is presented below (all per
      share amounts have been adjusted for the 2-for-1 stock split in
      2006).






Option
            
            
            Price
            
            
            Option
            
            
            PriceOutstanding
              at beginning of
              year
            
            
            107,960
            
            
            $
            11.84
            
            
            
            31,000
            
            
            $
            8.11Granted
            
            
            0
            
            
            
            0.00
            
            
            
            88,000
            
            
            
            13.00Exercised
            
            
            (760
            )
            
            
            8.00
            
            
            
            (4,040
            )
            
            
            8.00Rescinded
            
            
            0
            
            
            
            0.00
            
            
            
            (1,500
            )
            
            
            9.75Forfeited
            
            
            (10,000
            )
            
            
            13.00
            
            
            
            (5,500
            )
            
            
            12.70Outstanding
              at
              end of year
            
            
            97,200
            
            
            $
            11.76
            
            
            
            107,960
            
            
            $
            11.85Options
              exercisable at year end
            
            
            67,200
            
            
            $
            11.20
            
            
            
            56,960
            
            
            $
            10.81Weighted-average
                fair value of options granted duringthe
                year
            
            
            0
            
            
            
            
            
            
            $
            1.43





47
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      13 - STOCK BASED COMPENSATION (Continued)





Information
      pertaining to options outstanding at December 31, 2006 is as
      follows:






Range of
                Exercise Prices
            Number
              Outstanding
            Weighted
                Average
              Remaining
              Contractual Life
            Weighted
              Average
              Exercise Price
            Number
              Exercisable
            Weighted
              Average
              Exercise Price$8.00
              -
              $13.00
            97,200
            6.77
            $11.76
            67,200
            $
                11.20





The
      aggregate intrinsic value of the remaining outstanding options is $266 as of
      December 31, 2006.  As of December 31, 2006, the Company had $41 of
      unrecognized stock option expense which will be recognized over 2
      years.


NOTE 14 -
        EARNINGS PER SHARE
  A
        reconciliation of the numerators and denominators of the earnings per common
        share and earnings per common share assuming dilution computations are presented
        below.
    Basic
                earnings per
                share
              
              2006
              
              
              2005Net
                income
              
              $
              782
              
              
              $
              933Weighted
                average common shares outstanding
              
              
              1,214
              
              
              
              1,070Basic
                earnings
                per share
              
              $
              0.64
              
              
              $
              0.88Diluted
                earnings per share
              
              2006
              
              
              2005Net
                income
              
              $
              782
              
              
              $
              935Weighted
                average common shares outstanding
              
              
              1,214
              
              
              
              1,070Add: 
                Dilutive effects of assumed conversions and exercise of stock
                options
              
              
              13
              
              
              
              3Weighted
                average common and dilutive potential common shars outstanding
              
              
              1,227
              
              
              
              1,073Diluted
                earnings per share
              
              $
              0.63
              
              
              $
              0.87
 
  No stock
        options were excluded from the earnings per share calculation for 2006 or
        2005.
   NOTE
        15
        - LEASE COMMITMENTS
  The
        Bank
        leases certain office facilities and office equipment. On June 1, 2003, the
        Bank
        began leasing a branch building that has been classified as a capital lease
        for
        financial accounting purposes. This lease is for an initial ten year period
        with
        additional renewal options and purchase options.
  On
        March
        15, 2004, the Bank began leasing property in Knoxville, Tennessee on which
        the
        Cedar Bluff branch operates. This lease has been classified as an operating
        lease for financial accounting purposes. The initial term of the lease is
        for
        twenty years with four renewal option periods of five years. The bank has
        other
        leases which are classified as operating leases and provide for monthly lease
        payments over 12 to 180 months. Total lease expense under noncancellable
        operating leases for the years ended December 31, 2006 and 2005 totaled $97
        and
        $83.
  The
        following is a schedule of future minimum rental
        payments required under al lnoncancellable operating and capital leases as
        of December 31, 2006:
   Capital
                Lease
              Operating
                Leases
              Total2007
              30
              96
              1262008
              33
              79
              1122009
              36
              79
              1152010
              36
              79
              1152011
              36
              79
              115Thereafter
              51
              583
              634Total
                minimum
                lease payments
              222
              $ 995
              $
                1,217Less
                amount
                representing interest
              27Present
                value
                of minimum lease payments
              $ 
                195


NOTE
      16 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK





The
      Bank's primary business activity is with customers located within East
      Tennessee. As of December 31, 2006, the Bank had concentrations of loans secured
      by commercial properties and residential and other properties secured by real
      estate are shown in Note 4. The usual risk associated with such concentrations
      is generally mitigated by being spread over several hundred unrelated borrowers
      and by adequate loan-to-collateral value ratios. Note 3 describes the types
      and
      amounts of securities the Bank has invested in.












48
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS





The
      Financial Accounting Standards Board has issued Statement of Financial
      Accounting Standards No. 107, Disclosures About Fair Value
      of
      Financial Instruments (SFAS No. 107), which requires the Bank to disclose
      the fair value of financial instruments, both assets and liabilities recognized
      and not recognized in the statements of financial condition, for which it is
      practicable to estimate fair value.





According
      to SFAS No. 107, a financial instrument is defined as cash, evidence of an
      ownership interest in an entity, or a contract that both:  (1) imposes
      on one entity a contractual obligation to deliver cash or another financial
      instrument to a second entity, or to exchange other financial instruments on
      potentially unfavorable terms with the second entity, and (2) conveys to that
      second entity a contractual right to receive cash or another financial
      instrument from the first entity, or to exchange other financial instruments
      on
      potentially favorable terms with the first entity.





SFAS
      No.
      107 also states that the fair value of a financial instrument is the amount
      at
      which the instrument could be exchanged in a current transaction between willing
      parties, other than in a forced or liquidation sale. Quoted market prices in
      an
      active market, if available, are the best evidence of the fair value of
      financial instruments. For financial instruments that do not trade regularly,
      management's best estimate of fair value is based on either the quoted market
      price of a financial instrument with similar characteristics or on valuation
      techniques such as the present value of estimated future cash flows using a
      discount rate commensurate with the risks involved.





For
      the
      Bank, as for most financial institutions, the majority of its assets and
      liabilities are considered financial instruments as defined above. However,
      a
      large majority of those assets and liabilities do not have an active trading
      market nor are their characteristics similar to other financial instruments
      for
      which an active trading market exists. In addition, it is the Bank's practice
      and intent to hold the majority of its financial instruments to maturity and
      not
      to engage in trading or sales activities. Therefore, much of the information
      as
      well as the amounts disclosed below are highly subjective and judgmental in
      nature. The subjective factors include estimates of cash flows, risk
      characteristics, credit quality, and interest rates, all of which are subject
      to
      change. Because the fair value is estimated as of December 31, 2005 and
      2004, the amounts that will actually be realized or paid upon settlement or
      maturity of the various financial instruments could be significantly
      different.





The
      estimates of fair value are based on existing financial instruments without
      attempting to estimate the value of anticipated future business or activity
      nor
      the value of assets and liabilities that are not considered financial
      instruments. In addition, the tax implications related to the realization of
      unrealized gains and losses can have a significant effect on fair value
      estimates and have not been included in the estimated fair values
      below.





The
      following methods and assumptions were used to estimate the fair value of the
      following classes of financial instruments:





Cash
      and Cash Equivalents-
      Cash and cash equivalents include cash and due from banks and federal funds
      sold. For these short-term instruments, the recorded book value is a reasonable
      estimate of fair value.





Investment
      Securities- Quoted
      market prices are used to determine the estimated fair value of securities
      available for sale.


49
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
      (Continued)





Federal
      Home Loan Bank Stock-  Management does not consider it practicable to estimate the
      fair value of FHLB stock and also considers its carrying value to be immaterial
      in relation to the Company’s other financial instruments. Therefore, no estimate
      of fair value is disclosed.





Loans
      Held for Sale- Loans
      held for sale are generally short-term in nature and recorded book value is
      considered to approximate fair value.





Net
      Loans - The estimated fair
      value of fixed rate mortgage loans and commercial loans are calculated by
      discounting future cash flows to their present value. Future cash flows,
      consisting of both principal and interest payments, are discounted using current
      Bank rates for similar loans with similar maturities.





The
      estimated fair value of variable rate loans is considered equal to recorded
      book
      value.





Fixed
      rate installment loans have an average maturity of less than three years, a
      relatively stable average interest rate, and a variety of credit risks
      associated with them. The fair value of these loans is estimated by discounting
      future estimated cash flows to their present value using current Bank rates
      for
      similar loans with similar maturities.





The
      estimated fair value of the allowance for loan losses is considered to be
      recorded book value. Additionally, the credit exposure known to exist in the
      loan portfolio is embodied in the allowance for loan losses.




Deposits-
      The estimated fair
      value of demand, savings, NOW, and money market deposits is the amount payable
      on demand at the reporting date. The fair value of fixed-maturity certificates
      of deposit is estimated using the rates currently offered for deposits of
      similar maturities.





Securities
      Sold Under Agreements to
      Repurchase - Securities sold under agreements to repurchase are
      short-term in nature and recorded book value is considered to approximate fair
      value.





Advances
      From Federal Home Loan
      Bank - For advances that are fixed rate and fixed maturity liabilities,
      their fair value is estimated using rates currently available to the Bank for
      debt with similar terms and remaining maturities. Book value approximates fair
      value for advances that have variable rates.





Obligation
      Under Capital Lease
      - For 2006 and 2005, the book value approximates fair value since the rate
      used
      to estimate this obligation would not have changed significantly since it was
      incurred.





Subordinated
      Debentures - The
      fair value of the Company’s fixed rate subordinated debentures is estimated
      using discounted cash flows based on rates currently available to the Company
      for a similar type of borrowing arrangement.





Off-Balance-Sheet
      Loan
      Commitments - The fair value of loan commitments is based on fees
      currently charged to enter into similar agreements, taking into account the
      remaining terms of the agreements and the present creditworthiness of the
      counterparties. For fixed rate loan commitments, fair value also considers
      the
      difference between current levels of interest rates and the committed rates.
      The
      fair value of letters of credit is based on fees currently charged for similar
      agreements or on the estimated cost to terminate them or otherwise settle the
      obligations with the counterparties at the reporting date. The fair value of
      these items is not material to the Bank as of December 31, 2006 and
      2005.


50
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
      (Continued)





The
      recorded book value and estimated fair value of the Bank's financial instruments
      are as follows:






2006
            
            
            2005Recorded
              Book
                Value
            
            
            Estimated
              Fair Value
            
            
            Recorded
              Book Value
            
            
            Estimated
              Fair ValueFinancial
              Assets:Cash
              and cash
              equivalents
            
            $
            15,167
            
            
            $
            15,167
            
            
            $
            11,752
            
            
            $
            11,752Securities
              available for sale
            
            $
            20,156
            
            
            $
            20,156
            
            
            $
            18,721
            
            
            $
            18,721Loans
              held for
              sale
            
            $
            788
            
            
            $
            788
            
            
            $
            1,048
            
            
            $
            1,048Net
              loans
            
            $
            141,263
            
            
            $
            143,270
            
            
            $
            108,346
            
            
            $
            107,984Financial
              Liabilities:Deposits
            
            $
            153,352
            
            
            $
            154,231
            
            
            $
            124,833
            
            
            $
            124,879Securities
              sold under agreements to repurchase
            
            $
            303
            
            
            $
            303
            
            
            $
            274
            
            
            $
            274Advances
              from
              Federal Home Loan Bank
            
            $
            12,500
            
            
            $
            12,504
            
            
            $
            8,500
            
            
            $
            8,564Subordinated
              debentures
            
            $
            2,062
            
            
            $
            2,226
            
            
            $
            2,062
            
            
            $
            2,227Obligation
              under capital lease
            
            $
            195
            
            
            $
            195
            
            
            $
            217
            
            
            $
            217








NOTE
      18 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY





Condensed
      financial information pertaining only to Tennessee Valley Financial Holdings,
      Inc. is as follows:




As
                of December
                31,2006
            
            
            2005AssetsCash
              in
              bank
            
            $
            264
            
            
            $
            72Investment
              in
              common stock of TnBank
            
            
            18,114
            
            
            
            11,824Other
              assets
            
            
            184
            
            
            
            172Total
              Assets
            
            $
            18,562
            
            
            $
            12,068Liabilities
              -
              Subordinated Debentures
            
            $
            2,062
            
            
            $
            2,062Shareholders'
              Equity:Common
              stock
            
            
            1,501
            
            
            
            539Capital
              in excess of par value
            
            
            11,319
            
            
            
            6,610Retained Earnings
            
            
            3,680
            
            
            
            2,857Total Shareholders' Equity
            
            
            16,500
            
            
            
            10,006Total
              Liabilities and Shareholders'
              Equity
            
            $
            18,562
            
            
            $
            12,068








51
 TENNESSEE
            VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 December
              31, 2006 and 2005


NOTE
      18 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Continued)




CONDENSED
      STATEMENTS OF INCOME








For
                the Years Ended December 31,2006
            
            
            2005Income-Dividends
              from TNBANK
            
            $
            --
            
            
            $
            213Operating
              expenses
            
            
            321
            
            
            
            206Income
              before
              income tax benefit and equity in undistributed net income of
              TNBank
            
            
            (321
            )
            
            
            7Income
              tax
              benifits
            
            
            123
            
            
            
            82Equity
              in
              undistributed net income of TNBank
            
            
            980
            
            
            
            846Net
              Income
            
            $
            782
            
            
            $
            935




CONDENSED
      STATEMENTS OF CASH FLOWS






For
                the Years Ended December 31,2006
            
            
            2005Cash
              flows
              from operating activities:Net
              income
            
            $
            782
            
            
            $
            935Adjustments
              to
              reconcile net income to net cashProvided by (Used in) Operating Activities:Equity
              in undistributed net income of TNBank
            
            
            980
            
            
            
            846(Increase) Decrease in other assets
            
            
            (12
            )
            
            
            (144
            )Stock
              based compensation
            
            
            172
            
            
            
            24Total adjustments
            
            
            (820
            )
            
            
            (966
            )Net cash provided by (used in) operating activities
            
            
            (38
            )
            
            
            (31
            )Cash
                flows from investing activities:Capital
              investment in TNBank
            
            
            (5,269
            )
            
            
            (2,000
            )Cash
              flows
              from financing activities:Purchase and retirement of common stock
            
            
            --
            
            
            
            --Proceeds from issuance of common stock
            
            
            5,498
            
            
            
            32Proceeds from subordinated debentures
            
            
            --
            
            
            
            2,062Cash
              dividends paid
            
            
            --
            
            
            
            --Net cash provided by (used in) financing activities
            
            
            5,498
            
            
            
            2,012Net
              Change in Cash and Cash
              Equivalents
            
            
            191
            
            
            
            (19
            )Cash
              and Cash Equivalents, Beginning of Year
            
            
            73
            
            
            
            91Cash
              and Cash Equivalents, End of Year
            
            $
            264
            
            
            $
            72















52





ITEM
      8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





Not
      applicable.





ITEM
      8A - CONTROLS AND PROCEDURES





(a)   Evaluation
      of Disclosure Controls
      and Procedures.  Our President and Chief Executive Officer and
      our Vice President have evaluated the effectiveness of the design and operation
      of our disclosure controls and procedures (as defined in Exchange Act Rule
      13a-14(c)) as of the last day of the period covered by this annual report.
      Based
      on that evaluation, the President and Chief Executive Officer and the Vice
      President have concluded that our disclosure controls and procedures are
      effective to ensure that material information relating to us and our
      consolidated subsidiaries is made known to such officers by others within these
      entities, particularly during the period this annual report was prepared, in
      order to allow timely decisions regarding required disclosure.


(b)   Changes
      in Internal
      Controls.  There have not been any significant changes in our
      internal controls or in other factors that could significantly affect these
      controls subsequent to the date of their evaluation.




PART
        III


ITEM
      9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
      WITH SECTION 16(a) OF THE EXCHANGE ACT.





Audit
      Committee Financial Expert





We
      do not currently have an “audit
      committee financial expert” as defined under the rules of the Securities and
      Exchange Commission, serving on our Audit Committee. We believe that all of
      the
      members of the Audit Committee are qualified to serve on the committee and
      have
      the experience and knowledge to perform the duties required of the committee.
      We
      do not have any independent directors who would qualify as an audit committee
      financial expert, as defined. We believe that it has been, and may continue
      to
      be, impractical to recruit such a director unless and until we are significantly
      larger.





Code
      of Ethics





We
      have adopted a code of ethics that
      applies to our senior management, including our chief executive officer, vice
      president (principal accounting officer) and persons performing similar
      functions. Copies of our code of ethics are available without charge upon
      written request directed to Jason B. Wilkinson, Vice President, TnBank, 401
      S.
      Illinois Avenue, Oak Ridge TN  37830.





The
      remainder of this item is
      incorporated by reference to the sections entitled “Management of the Company”
and “Beneficial Ownership Reporting Compliance” of our 2007 Proxy
      Statement.





ITEM
      10 - EXECUTIVE COMPENSATION





This
      item is incorporated by reference
      to the sections entitled “Executive Compensation,” “Stock Options” and
“Directors' Compensation” of our 2007 Proxy Statement.





ITEM
      11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





This
      item is incorporated by reference
      to the section entitled “Information Regarding Certain Beneficial Owners” of our
      2007 Proxy Statement.








ITEM
      12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





This
      item is incorporated by reference
      to the section entitled “Certain Relationships and Related Transactions” in our
      2007 Proxy Statement.








53





ITEM
      13 - EXHIBITS LIST AND REPORTS ON FORM 8-K





(a)           
      Exhibits







Exhibit
              No.
            Description3.1*
            Charter
              of Tennessee Valley Financial Holdings, Inc.3.2*
            Bylaws
              of Tennessee Valley Financial Holdings, Inc.21.1
            Subsidiaries
              of Tennessee Valley Financial Holdings, Inc.23.1
            Consent
                of Independent Registered Public Accounting Firm23.2
            Consent
              of Independent Registered Public Accounting Firm31.1
            Certification
                of Thomas E. Tuck, President and Chief Executive Officer of Tennessee
                Valley Financial Holdings, Inc., Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.


31.2
            Certification
                of Jason B. Wilkinson., the Vice President (principal accounting
                and
                financial officer) of Tennessee Valley Financial Holdings, Inc.,
                Pursuant
                to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1
            Certification
                of Thomas E. Tuck, President and Chief Executive Officer of Tennessee
                Valley Financial Holdings, Inc., Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.


32.2
            Certification
                of Jason B. Wilkinson, the Vice President (principal accounting
                and financial officer) of Tennessee Valley Financial Holdings, Inc.,
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





______________________


*
                Incorporated by reference to the Company’s Registration Statement on Form
                10-SB filed with the Securities and Exchange Commission on June 13,
                2002.







ITEM
      14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES





This
      item is incorporated by reference
      to the section entitled “Principal Accountant Fees and Services” in our 2007
      Proxy Statement.


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SIGNATURES





In
      accordance with Section 13 or 15(d) or the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.







Tennessee
      Valley Financial Holdings, Inc.








By: /s/Thomas
      E. Tuck


Thomas
      E. Tuck


President
      and CEO


Date:  January
      16, 2008











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