United States
 Securities
and Exchange Commission
 Washington,
D.C. 20549
 
 FORM
10-KSB
 
 x Annual Report Pursuant
To Section 13 or 15(d) of The Securities Exchange Act of 1934
  For the Fiscal Year
ended December 31, 2007
 
 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.
 
 Check if
there is no disclosure of delinquent filers in response to items 405 of
Regulation S-B 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. x
  o x
  The
registrant’s revenues for the most recent fiscal year were
$14,557,000.
 
 At
March 31,2008, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $9,749,696.
 
 As of
March 31,2008, registrant had 1,510,431 shares of its $1.00 par value
common stock outstanding.
 
 Documents
Incorporated by Reference: Proxy Statement related to 2008
Annual Meeting of Shareholders.





Table
of Contents
 
 Part I:
              
              PageItem
      1:
              Description
      of Business
              1Item 2:
              Description
      of Property
              10Item 3:
              Legal
      Proceedings
              11Item 4:
              Submission
      of Matters to a Vote of Security Holders
              11Part II:Item
      5:
              Market
      for Common Stock and Related Stockholder Matters
              12Item
      6:
              Management’s
      Discussion and Analysis or Plan of Operation
              13Item
      7:
              Financial
      Statements
              24Part
      III:Item
      8:
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              52Item
      8A(T):
              Controls
      and Procedures
              52Item
      9:
              Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a) of the Exchange Act
              52Item
      10:
              Executive
      Compensation
              52Item
      11:
              Security
      Ownership of Certain Beneficial Owners and Management
              52Item
      12:
              Certain
      Relationships and Related Transactions
              52Part
      IV:Item
      13
              Exhibits
              53Item
      14:
              Principal
      Accountant Fees and Services
              53Signatures
              
              54


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, located in Oak Ridge, 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,
automated teller machine (ATM) services, and drive-thru services at all branch
locations.  We provide VISA credit cards and are a merchant depository
for their credit card drafts. 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 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, 2007 we had 59 full-time employees and seven 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, 2007, the net loan portfolio
totaled $146.0 million, or 72% 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.





2


The
maximum amount which we could have loaned directly to any one borrower as of
December 31, 2007, was approximately $4.6 million. Our largest loan relationship
is $2.4 million consisting of several loans secured by commercial real estate
and residential real estate, which were made prior to December 31,
2007.





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, 2007, $47.7 million or 33% of the total loan
portfolio consisted of one-to-four family residential real estate loans. As of
this date, approximately $26.3 million, or 55% 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, 2007, consumer loans amounted to $25.3 million or
17% 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, 2007, the largest commercial relationship was $662,000 secured by
inventory and equipment. As of December 31, 2007, we had $29.4 million in
commercial loans or 20% 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 $12.5 million or 9% of the
total loan portfolio as of December 31, 2007. 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.




3


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.





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.





4


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.





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.





5


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.





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 March 19, 2008, 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.





6


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.





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.





7


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 March 19, 2008, 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.





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 March 19, 2008, the Bank believes the brokered deposits
regulation will have no material effect on the funding or liquidity of the
Bank.





8


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.





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, 2007, the Bank is not the subject of any action by the FDIC
or the TDFI.





9


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.




ITEM
2.   DESCRIPTION OF PROPERTY





We
operate five full-service banking facilities. We own our two Oak Ridge and one
Blount County branch facilities and lease current operating Knoxville locations.
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.





The main
office is located at 401 S. Illinois Avenue in Oak Ridge. The 15,000 square foot
facility on approximately three acres 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.





10


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
Blount County office is located at 1311 W. Lamar Alexander Parkway, Maryville,
Tennessee.  This 7,600 square foot location is a fully renovated full
service banking location including ATM, safe deposit, night depository and drive
thru services.  This location was opened in November
2007.





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 2007.






11





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 March 31, 2008, Tennessee Valley
Financial Holdings, Inc., had 1,510,431 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 March
19, 2008, the Company estimates that it had 897 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
            Low2007:First Quarter
            $15.00
            $14.38Second Quarter
            14.67
            14.38Third Quarter
            14.67
            14.00Fourth Quarter
            14.25
            12.752006:First Quarter
            $14.00
            $14.00Second Quarter
            14.00
            14.00Third Quarter
            14.00
            14.00Fourth Quarter
            14.50
            14.00




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.” 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.





The following table provides
information about our equity compensation plans as of December
31, 2007.





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
            348,474Equity
      compensation
              plans
      not approved
              by
      shareholders
            0
              ______________
            NA
              ______________
            0
              ______________Total
            97,200
            $11.76
            348,474





12


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.





Results
of Operations for the Years Ended December 31, 2007 and 2006





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 $243,000 for 2007 as compared to $782,000 for 2006, a
decrease of 69%. On a per share basis, we earned $0.16 per common share in 2007
compared to $0.63 per common share in 2006. The decrease in net income for 2007
can primarily be attributed to an increase in the allowance for loan losses
related to consumer and real estate construction loans. Although net loans
increased to $146.0 million in 2007 from $141.3 million in 2006, a 3% increase,
the allowance for loan losses increased to approximately $2.3 million in 2007
from approximately $1.6 million in 2006, a 45% increase.





The table
below presents certain key ratios.





2007
            2006Return on Average
      Assets
            0.13%
            0.48%Return on Average
      Equity
            1.46%
            6.74%Dividend Payout
      Ratio
            28.77%
            0.00%Average Equity to Average
      Assets
            8.63%
            7.10%




13


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, 2007 and 2006.





Schedule
      II
              Average
      Balances, Interest and Rate/Yield (in Thousands)2007
            
            
            2006Average
              Balance(1)
            
            
            Interest
            
            
            Average
              Yield/Rate
            
            
            Average
              Balance
      (1)
            
            
            Interest
            
            
            Average
              Yield/RateAssetsFederal funds
    sold
            
            $
            11,181
            
            
            $
            583
            
            
            
            5.21
            %
            
            $
            5,890
            
            
            $
            289
            
            
            
            4.91
            %Investment
      securities:Available for
      sale:Taxable
            
            
            13,739
            
            
            
            628
            
            
            
            4.57
            %
            
            
            12,422
            
            
            
            515
            
            
            
            4.15
            %Tax exempt
            
            
            9,301
            
            
            
            410
            
            
            
            4.41
            %
            
            
            6,837
            
            
            
            310
            
            
            
            4.52
            %FHLB stock
            
            
            686
            
            
            
            42
            
            
            
            6.12
            %
            
            
            619
            
            
            
            35
            
            
            
            5.68
            %Gross loans, including
      fees
            
            
            147,974
            
            
            
            11,824
            
            
            
            7.99
            %
            
            
            128,389
            
            
            
            10,341
            
            
            
            8.05
            %Total interest earnings assets
            
            
            182,881
            
            
            $
            13,487
            
            
            
            7.37
            %
            
            
            154,157
            
            
            $
            11,490
            
            
            
            7.45
            %All other
    assets
            
            
            12,826
            
            
            
            
            
            
            
            
            
            
            
            10,781Less:Reserve for loan
      losses
            
            
            1,763
            
            
            
            
            
            
            
            
            
            
            
            1,492Unearned fees and
      interest
            
            
            112
            
            
            
            
            
            
            
            
            
            
            
            135Total assets
            
            $
            193,832
            
            
            
            
            
            
            
            
            
            
            $
            163,311Liabilities and Shareholders'
      EquityInterest bearing
      deposits:Time deposits
            
            $
            101,526
            
            
            $
            5,131
            
            
            
            5.05
            %
            
            $
            81,536
            
            
            $
            3,678
            
            
            
            4.51
            %Other deposits
            
            
            44,135
            
            
            
            846
            
            
            
            1.92
            %
            
            
            45,222
            
            
            
            881
            
            
            
            1.95
            %FHLB advances andrepurchase
    agreementsand other
            
            
            15,854
            
            
            
            763
            
            
            
            4.81
            %
            
            
            10,860
            
            
            
            534
            
            
            
            4.92
            %Total
      interest-bearingliabilities
            
            
            161,515
            
            
            $
            6,740
            
            
            
            4.17
            %
            
            
            137,618
            
            
            $
            5,093
            
            
            
            3.70
            %Non-interest
      bearingdeposits
            
            
            14,324
            
            
            
            
            
            
            
            
            
            
            
            13,008Cost of funds
            
            
            
            
            
            
            
            
            
            
            3.83
            %
            
            
            
            
            
            
            
            
            
            
            3.38
            %All other
      liabilities
            
            
            1,506
            
            
            
            
            
            
            
            
            
            
            
            927Shareholders'
      equity
            
            
            16,366
            
            
            
            
            
            
            
            
            
            
            
            11,592Unrealized gain on available
      for sale securities
            
            
            121
            
            
            
            
            
            
            
            
            
            
            
            166Total liabilities and shareholders'
      equity
            
            $
            193,832
            
            
            
            
            
            
            
            
            
            
            $
            163,311Net interest
    spread
            
            
            
            
            
            
            
            
            
            
            3.54
            %
            
            
            
            
            
            
            
            
            
            
            4.07
            %Net interest
    margin
            
            
            
            
            
            
            
            
            
            
            3.69
            %
            
            
            
            
            
            
            
            
            
            
            4.15
            %





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





As seen
from Schedule II, average interest earning assets grew $28.7 million or 18.6%
during 2007 as compared to 2006. Average interest earning assets include loans,
investment securities and federal funds sold. The primary component of growth in
average interest earning assets was loans, which grew $19.6 million or 15.3% in
2007 as compared to 2006. Average investment securities (which includes average
available for sale taxable and tax-exempt securities and Federal Home Loan Bank
stock) increased approximately $3.8 million in 2007 as compared to 2006, while
average federal funds sold increased approximately $5.3 million in 2007 as
compared to 2006.





Average
interest bearing liabilities grew $23.9 million or 17.3% in 2007 as compared to
2006. Average interest bearing liabilities include deposits, advances from the
Federal Home Loan Bank (“FHLB”) and other borrowings. During 2007, average total
deposits grew $20.2 million or 14.5% as compared to 2006. The majority of the
average deposit growth during 2007 came from time deposits, which include
Certificates of Deposits. The notable increase in time deposits is primarily due
to several promotional programs and the purchase of approximately $7 million of
Brokered Certificates of Deposit.





14


The yield
on average interest earning assets decreased 8 basis points during 2007 to
7.37%. The primary reason for this decrease can be attributed to the declining
interest rate environment. The incremental lowering of key interest rates by the
Federal Reserve began in the third quarter of 2007. The yield on earning
assets has fallen because of the immediate lowering of rates on our loans tied
to prime rate, as well as the addition of new loans added at lower rates in the
recent falling rate environment.





The yield
on loans for 2007 was 7.99%, a decrease of 6 basis points as compared to 2006.
The performance of the loan portfolio can be primarily attributed
to interest rate environment as discussed previously. New loans made during
2007 generally carried lower yields than those originated in 2006. Yields on
taxable investment securities increased 42 basis points and yields on tax-exempt
securities decreased 11 basis points during 2007 as compared to 2006. The yield
on FHLB Stock for 2007 was 6.12%, an increase of 44 basis points as compared to
2006.  The overall increase in the yield on available for sale
investment securities can be attributed to the sales and calls of lower yielding
taxable securities while purchases of higher yielding securities increased.
Because of the increase in purchases, interest payments and prepayments
(mortgage-backed securities) have increased leading to higher yields on taxable
securities. The yield on federal funds increased 30 basis points in 2007
compared to 2006.





Our cost
of funds increased 45 basis points to 3.83% during 2007 from 3.38% in 2006. This
level can be primarily attributed to local competition and the general interest
rate environment described above. Rates on time deposits increased 54 basis
points to 5.05% in 2007 as compared to 2006. Other interest-bearing deposits saw
rates decreased 3 basis points during 2007 to 1.92%. 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
decreased 11 basis points during 2007 to 4.81% due to the overall interest rate
environment. We have a cash management line of credit with the FHLB which is
priced on a daily basis.





Our net
interest margin decreased to 3.69% in 2007 compared to 4.15% during 2006.
Tightening of the net interest margin in 2007 compared to 2006 can be attributed
to the addition of a larger volume of time deposits at higher rates in relation
to the addition of fewer loans originated and variable rate loans re-pricing at
lower rates.





Schedule
      III
              Rate
      Volume Analysis (in Thousands)2007
      vs 2006
              Increase
      (decrease) due to change inAverage
      Balance
            
            
            Rate/Yield
            
            
            TotalInterest
      income:Federal funds
    sold
            
            $
            275
            
            
            $
            19
            
            
            $
            294Securities available for
      sale
            
            
            169
            
            
            
            44
            
            
            
            213FHLB stock
            
            
            4
            
            
            
            3
            
            
            
            7Loans, including
      fees
            
            
            1,564
            
            
            
            (81
            )
            
            
            1,483Total interest
    income
            
            
            2,012
            
            
            
            (15
            )
            
            
            1,997Interest
      expense:Interest-bearing
      deposits
            
            
            729
            
            
            
            689
            
            
            
            1,418FHLB advances, repurchase
      agreement and other
            
            
            240
            
            
            
            (11
            )
            
            
            229Total interest
      expense
            
            
            969
            
            
            
            678
            
            
            
            1,647Net change in net interest
      income
            
            $
            1,043
            
            
            $
            (693
            )
            
            $
            350






15


Noninterest
Income





Noninterest income increased
approximately $72,000 or approximately 7.2% in 2007 as compared to 2006 due
primarily to increases in service charges on demand
deposits.  This increase in service charges is due mainly to an
increase in the volume of our deposit accounts as a result of an increased
emphasis on core deposit growth throughout the Bank.  Service charges
also increased due to ATM usage of customers as well as non-customers.  We
offer traditional residential mortgage financing through the secondary market
which remained relatively flat for 2007 compared to 2006. 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 $9,000 during 2007 as compared to
2006. Service charges increased approximately $151,000 during 2007 compared
to 2006.  Gains on sales of investment securities were the result of
sales and calls of securities. These proceeds decreased approximately $17,000 in
2007 as compared to 2006. Other income decreased approximately $71,000 during
2007 as compared to 2006 primarily due to gains realized on sales of repossessed
assets during 2006.





Noninterest
Expense





Noninterest expense increased
approximately $347,000, or 6%, during 2007 as compared to 2006. This increase is
mainly the result of an increase of greater than 20% in three categories of
noninterest expense: furniture and equipment, data processing fees, and legal
and professional fees.  Furniture and equipment increased $84,000, or
35% in 2007 compared to 2006. This increase was a direct result of the opening
of the permanent location for the Blount County branch.  This branch
was fully furnished and decorated in 2007 which resulted in several
non-capital expenditures.  Data processing expense increased $142,000,
or 28%, in 2007 compared to 2006. This increase was a result of our addition of
the internal network and data lines in the completed Blount County location and
the restructuring of the Bank’s business resumption strategy in the fourth
quarter 2007.  Legal and professional fees increased $132,000, or 75%,
in 2007 compared to 2006. This was primarily due to increased costs associated
with regulatory compliance issues of being a publicly held company and increased
costs related to the use of a new audit firm beginning at year-end
2006.  Although noninterest expense increased overall, loan expense
decreased $121,000, or 33%, in 2007 compared to 2006 due primarily to a lower
number of originations generating fewer fees and related costs on revolving
lines of credit.





Salaries and employee benefits
increased $115,000, or 4%, while net occupancy expense decreased $92,000, or
11%, in 2007 compared to 2006.  Advertising and promotion, director’s
fees, and other noninterest expense all increased 10%, or $15,000, $12,000, and
$50,000, respectively, in 2007 compared to 2006.  Office supplies and
postage increased $10,000, or 5%, in 2007 compared to 2006.





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 $4,000 for 2007 compared to approximately $358,000 in 2006, a 99%
reduction. The reduction is due in part to the increase in tax exempt
interest income from investments in obligations of states and political
subdivisions as well as the increase in provisioning for loan charge
offs.





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
$2,284,000 or 1.54% of gross loans outstanding at December 31, 2007 as compared
to 1.10% of gross loans outstanding in 2006. During 2007, the loan loss
provision totaled $1,439,000, an increase of approximately $968,000 as compared
to 2006.  The 2007 net charge-off ratio increased to 0.50% from 0.23%
in 2006.  As of December 31, 2007, 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, 2007
approximately $5.9 million of the loan portfolio was considered specifically
classified with approximately 37.8% of the allowance for loan losses related to
these loans. We assigned the remaining 62.2% 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.  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 $585,000 as of December 31, 2007 and $333,000 as of December
31, 2006. Schedules IV and V present a summary of our loan loss experience and
reserve analysis during 2007 and 2006.


17





Schedule
      IV
              Analysis
      of Loan Loss Reserve (in Thousands)The
      Year Ended December 31,2007
            
            
            2006Balance at beginning of
      period
            
            $
            1,578
            
            
            $
            1,406Charge-offs:Commercial, financial and
      agricultural
            
            
            -
            
            
            
            16Real estate –
      mortgage
            
            
            158
            
            
            
            96Real
      estate – nonfarm, nonresidential
            
            
            72
            
            
            
            61Installment –
      consumer
            
            
            527
            
            
            
            168Total charge-offs
            
            
            757
            
            
            
            341Recoveries:Commercial, financial and
      agricultural
            
            
            3
            
            
            
            12Real estate –
      mortgage
            
            
            1
            
            
            
            -Real
      estate – nonfarm, nonresidential
            
            
            1
            
            
            
            1Installment –
      consumer
            
            
            19
            
            
            
            29Total recoveries
            
            
            24
            
            
            
            42Net charge-offs
            
            
            733
            
            
            
            299Provision for loan
      losses
            
            
            1,439
            
            
            
            471Balance at the end of
      period
            
            $
            2,284
            
            
            $
            1,578Ratio of net charge-offs to
      average loansoutstanding
            
            
            0.50
            %
            
            
            0.23
            %








Schedule
      V
              Allocation
      of Loan Loss Reserve (in Thousands)2007
            
            
            2006$
              Allocation
            
            
            %
              Allocation
            
            
            $
              Allocation
            
            
            %
              AllocationCommercial, financial and
      agricultural
            
            $
            142
            
            
            
            6
            %
            
            $
            450
            
            
            
            29
            %Real estate -
      construction
            
            
            620
            
            
            
            27
            %
            
            
            30
            
            
            
            2
            %Real estate -
      mortgage
            
            
            1,078
            
            
            
            47
            %
            
            
            644
            
            
            
            41
            %Real
      estate – nonfarm, nonresidential
            
            
            6
            
            
            
            0
            %
            
            
            -
            
            
            
            0
            %Installment -
      consumer
            
            
            330
            
            
            
            14
            %
            
            
            316
            
            
            
            20
            %Unallocated
    reserve
            
            
            108
            
            
            
            5
            %
            
            
            138
            
            
            
            9
            %Total
            
            $
            2,284
            
            
            
            
            
            
            $
            1,578





18


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.





Schedule VI presents the amounts of
non-performing assets at December 31, 2007 and 2006.





Schedule
      VI
              Non-Performing
      Assets (in Thousands)December
      31,2007
            
            
            2006Non-accrual loans
    (1)
            
            $
            3,230
            
            
            $
            326Loans past due greater than 90
      days and still accruing interest
      (2)
            
            
            1,016
            
            
            
            19Restructured
    loans
            
            
            172
            
            
            
            170Other real estate
      owned
            
            
            363
            
            
            
            507Total non-performing
      assets
            
            $
            4,781
            
            
            $
            1,022




(1)
            Included
      in non-accrual loans is approximately $3,230,000 and $326,000 of loans
      considered impaired as of December 31, 2007 and 2006,
      respectively.




(2)
            No
      loans past due 90 days or more and no restructured loans are considered
      impaired as of December 31, 2007 and
2006.





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 2007, we would have earned
approximately $172,000 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 $3,230,000 as of December 31, 2007 compared to $326,000 as of
December 31, 2006.  Loans past due greater than 90 days and still
accruing interest increased to $577,000 at December 31, 2007 from $19,000 at
December 31, 2006.  Net charge-offs increased to $733,000 during 2007
as compared to $299,000 in 2006.  The ratio of net charge-offs to
average loans was 0.50% for 2007 and 0.23% for 2006.  There are three
main factors that are responsible for the considerable increase in non-accrual
loans, past due loans, classified loans, and the net charge-off
ratio.  The first factor is the general slowdown of the
economy.  Economic slowdowns decrease a borrower’s ability to make
payments on their outstanding balances.  While generating possible
income from past due fees, unpaid balances cause increases in non-accrual loans,
classified loans, and possible charge-offs and repossessions.





19


The second factor causing increases in
non-accrual loans, classified loans, and the net charge-off ratio is the
deterioration of one of the Bank’s indirect financing
relationships.  The Bank had an indirect relationship with a local
automobile dealership.  The relationship was constituted by a
guarantee from the automobile dealership for several automobiles.  In
late 2007, the dealership ceased operations, nullifying the guarantee with the
Bank and causing an increase in non-accrual loans, past due loans, charge-offs
and repossessions.





The final factor impacting non-accrual,
past due, and classified loans involves relationships associated with the
construction of speculative real estate.  Due to the slowing real
estate market, there are fewer buyers of speculative real
estate.  This has caused an increased number of foreclosures in the
general market on speculative properties.  These conditions also
negatively affect the borrowers' ability to repay their debt and repay it in a
timely manner.




Of the loans in non-accrual status as
of December 31, 2006, approximately $38,000 were charged off during 2007.
Additionally, approximately $4.1 million were added to nonaccrual status during
2007.  Approximately, $1.2 million were removed from nonaccrual
status due to improvement in performance, paydowns, pay-offs, charge-offs,
restructuring, or foreclosure.  Non-accrual loans, as of December 31,
2007, include $326,000 in loans that were nonaccrual as of December 31,
2006.  There were eight loans totaling $1.0 million that were over 90
days and still accruing interest as of December 31, 2007.  It is our
policy to place loans on nonaccrual after they reach 90 days past due unless the
loan is well collateralized.





Loans increased $5.3 million to $146.0
million as of December 31, 2007 as compared to December 31, 2006. Management
attributes the nominal growth in loans to a slowing economy and a stagnant real
estate market.





Schedule
      VII
              Loans
      by Type (in Thousands)December
      31,2007
            
            
            2006Loans secured by real
      estate:Commercial
      properties
            
            $
            12,528
            
            
            $
            15,788Construction and land
      development
            
            
            33,345
            
            
            
            36,561Residential and other
      properties
            
            
            47,699
            
            
            
            41,444Total loans secured by real
      estate
            
            
            93,572
            
            
            
            93,793Commercial and industrial
      loans
            
            
            29,442
            
            
            
            23,308Consumer loans and
      other
            
            
            25,298
            
            
            
            25,880148,312
            
            
            
            142,981Less: Allowance for loan
      losses
            
            
            (2,284
            )
            
            
            (1,578
            )Unearned loan fees
            
            
            (77
            )
            
            
            (140
            )$
            145,951
            
            
            $
            141,263





Investment
Securities





Investment securities were $32.9
million as of December 31, 2007 compared to $20.2 million as of December 31,
2006. At December 31, 2007 and 2006, all of our investment securities were
classified available for sale. During 2007, $17.1 million in available for sale
securities were purchased as compared to $6.1 million in purchases of available
for sale securities in 2006. Maturities, calls and principal payments received
from mortgage-backed securities totaled $3.4 million in 2007 and $3.6 million in
2006. Proceeds from the sale of available for sale securities in 2007 totaled
$932,000, with gross gains on these sales of $6,000 and gross losses of $0.
Proceeds from the sale of available for sale securities in 2006 totaled $1.1
million, with gross gains on the sales of $23,000, and gross losses $0. 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
$36,000 at December 31, 2007 compared to $110,000 at December 31, 2006. 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.





20


The investment portfolio is primarily
comprised of U.S. Government 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 46% of the portfolio at December 31,
2007 and 32% at December 31, 2006. Schedule VIII sets forth the maturity of the
securities held in the investment portfolio as of December 31,
2007:





Schedule
      VIII
              Maturities
      of Securities at December 31, 2007 (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.
      Government agencies
            
            $
            2,017
            
            
            
            4.06
            %
            
            $
            2,050
            
            
            
            4.70
            %
            
            $
            700
            
            
            
            5.09
            %Mortgage-backed and
      relatedsecurities
            
            
            61
            
            
            
            6.31
            %
            
            
            270
            
            
            
            4.63
            %
            
            
            490
            
            
            
            5.15
            %Obligations of  State and
      politicalsubdivisions
            
            
            111
            
            
            
            8.09
            %
            
            
            757
            
            
            
            6.69
            %
            
            
            2,239
            
            
            
            5.39
            %Equity
      securities
            
            
            -
            
            
            
            0.00
            %
            
            
            500
            
            
            
            10.38
            %
            
            
            294
            
            
            
            8.21
            %Total debt
    securities
            
            $
            2,189
            
            
            
            4.33
            %
            
            $
            3,577
            
            
            
            5.91
            %
            
            $
            3,722
            
            
            
            5.52
            %Due
      After Ten Years
            
            
            TotalAmount
            
            
            Yield
            
            
            Amount
            
            
            YieldSecurities
      available for sale:U.S.
      Government
      agencies
            
            $
            500
            
            
            
            5.89
            %
            
            $
            5,267
            
            
            
            4.62
            %Mortgage-backed and
      relatedSecurities
            
            
            14,204
            
            
            
            5.42
            %
            
            
            15,025
            
            
            
            5.40
            %Obligations of State and
      politicalSubdivisions
            
            
            8,697
            
            
            
            5.95
            %
            
            
            11,804
            
            
            
            5.91
            %Equity
      securities
            
            
            --
            
            
            
            0.00
            %
            
            
            794
            
            
            
            9.45
            %Total debt
    securities
            
            $
            23,402
            
            
            
            5.63
            %
            
            $
            32,890
            
            
            
            5.59
            %








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 further decline. Management
continually monitors the asset liability position and takes corrective measures
where possible.


21





Schedule
      IX
              Interest
      Rate Sensitivity Analysis (in Thousands)
              As
      of December 31, 2007Within
              3
      Months
            
            3
      Months to
              1
      year
            
            1
      to
              5
      Years
            
            After
              5
      Years
            
            TotalEarning assets:Loans
            $67,213
            
            $19,256
            
            $36,193
            
            $25,574
            
            $148,236Investment
    securities
            5,882
            
            2,399
            
            8,005
            
            16,604
            
            32,890Federal funds
sold
            9,439
            
            -
            
            -
            
            -
            
            9,439Total earning
    assets
            82,534
            
            21,655
            
            44,198
            
            42,178
            
            190,565Interest-bearing
      liabilities:Interest-bearing
      deposits
            67,246
            
            56,590
            
            20,528
            
            2,094
            
            146,458FHLB advances
            7,000
            
            6,000
            
            5,500
            
            -
            
            18,500Other borrowings
            811
            
            171
            
            2,062
            
            -
            
            3,044Total interest-bearing
      liabilities
            75,057
            
            62,761
            
            28,090
            
            2,094
            
            168,002Repricing gap
            7,477
            
            (41,106)
            
            16,108
            
            40,084
            
            22,563Repricing gap
      as a percentage of earning assets
            3.9%
            
            -21.6%
            
            8.5%
            
            21.0%Cumulative repricing
      gap
            7,477
            
            (33,629)
            
            (17,521)
            
            22,563
            
            22,563Cumulative repricing gap as a
      percentageof earning assets
            3.9%
            
            -17.6%
            
            -9.2%
            
            11.8%





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.





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, federal funds lines, and FHLB
advances.





At December 31, 2007, we held $32.9
million in available-for-sale securities. Deposits increased $9.8 million during
2007. We had $18.5 million in available federal funds lines and approximately
$7.1 million in potentially available borrowings from the FHLB as of December
31, 2007.





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, 2007 we had $18.5 million in outstanding advances with the FHLB. We
had $1.5 million in fixed rate advances which offer fixed interest rates on
balances that are due at maturity. We had $3.0 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, $1.0 million in 2/1 putable advances,
$5.0 million in 10/1 putable advances, and $5.0 million in 7/3 putable
advances..  These instruments have fixed rates for a minimum of one
year and a maximum of 2, 5, 7 or 10 years, respectfully.  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, 2007 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, 2007, we had $811,000 in repurchase agreements
outstanding.





22


At December 31, 2007, we had qualifying
capital of $20.5 million, or 13.1% of total risk-based assets as compared to
$19.8 million, or 13.4% at December 31, 2006. 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 July 2006, the
Financial Accounting Standards Board (“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 adopted Interpretation No.
48 effective January 1, 2007, resulting in no adjustment to beginning retained
earnings.
  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 does not anticipate
that Statement 157 will have a material impact on its consolidated financial
statements.
  In February
2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities”.   This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value.  The objective of this standard is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions.  This
statement is effective as of the beginning of fiscal years beginning after
November 15, 2007, with early adoption permitted under certain
circumstances.  The Company did not choose to early adopt this
standard and does not anticipate that Statement 159 will have a material impact
on its consolidated financial statements.


23


ITEM
7.    FINANCIAL STATEMENTS





Index
to Financial Statements





Report of
      Independent Registered Public Accounting
      Firm .......................................................................................................
              25Consolidated
      Balance Sheets as of December 31, 2007 and
      006 .................................................................................................
              26Consolidated
      Statements of Income for the Years ended December 31, 2007 and
      2006 ..........................................................
              27Consolidated
      Statements of Comprehensive Income for theYears
      ended December 31, 2007 and
      2006...............................
              28Consolidated
      Statements of Changes in Shareholders’ Equity for theYears
      ended December 31, 2007 and 2006 .............
              29Consolidated
      Statements of Cash Flows for the Years ended December 31, 2007 and
      2006 ...................................................
              30Notes to
      Consolidated Financial
      Statements ..................................................................................................................................
              32








































24








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and the Shareholders




Tennessee
Valley Financial Holdings, Inc.








We have
audited the accompanying consolidated balance sheets of Tennessee Valley
Financial Holdings, Inc. and subsidiary  (the “Company”) as of December 31,
2007 and 2006, and the related statements of income, comprehensive income,
changes in shareholders’ equity and cash flows for the years 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 audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Tennessee Valley Financial
Holdings, Inc. and subsidiary as of December 31, 2007 and 2006, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of
America.














Asheville,
North Carolina




March 31,
2008
















25


TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY


Consolidated
Balance Sheets


As of
December 31, 2007 and 2006


(amounts
in thousands, except share and per-share data)






2007
            
            
            2006AssetsCash
      and due from
      banks
            
            $
            3,000
            
            
            $
            3,226Federal funds
      sold
            
            
            9,439
            
            
            
            11,941Cash and cash equivalents
            
            
            12,439
            
            
            
            15,167Investment
      securities available for sale, at fair value
            
            
            32,890
            
            
            
            20,156Loans held for
      sale
            
            
            1,511
            
            
            
            788Loans,
      net
            
            
            145,951
            
            
            
            141,263Federal Home
      Loan Bank Stock, at cost
            
            
            703
            
            
            
            634Premises and
      equipment, net
            
            
            7,136
            
            
            
            5,132Accrued
      interest receivable
            
            
            1,188
            
            
            
            1,119Deferred
      income tax benefit
            
            
            381
            
            
            
            278Foreclosure
      real estate
            
            
            363
            
            
            
            507Prepaid
      expenses and other
            
            
            242
            
            
            
            1,468Total assets
            
            $
            202,804
            
            
            $
            186,512Liabilities and
      Shareholders' EquityLiabilities:Deposits:Noninterest bearing
            
            $
            16,727
            
            
            $
            13,944Interest bearing
            
            
            146,458
            
            
            
            139,408Total deposits
            
            
            163,185
            
            
            
            153,352Borrowings
            
            
            21,544
            
            
            
            15,060Accrued interest payable
            
            
            1,180
            
            
            
            1,245Other
      liabilities
            
            
            158
            
            
            
            355Total liabilities
            
            
            186,067
            
            
            
            170,012Shareholders'
      equity:Common stock, par value $1, authorized 2,000,000 shares; issued and
      outstanding, 1,510,431 and 1,500,700 shares at December 31,  2007and
      2006, respectively
            
            
            1,510
            
            
            
            1,501Treasury stock, 496 shares
            
            
            (7)
            
            
            
            --Capital
      in excess of par value
            
            
            11,488
            
            
            
            11,319Retained earnings
            
            
            3,768
            
            
            
            3,75016,759
            
            
            
            16,570Accumulated other comprehensive loss
            
            
            (22)
            
            
            
            (70)Total
      shareholders' equity
            
            
            16,737
            
            
            
            16,500Total
      liabilities and shareholders' equity
            
            
            $202,804
            
            
            
            $186,512








The
accompanying notes are an integral part of these consolidated financial
statements.










26


TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY


Consolidated
Statements of Income


For the
Years Ended December 31, 2007 and 2006


(amounts
in thousands, except share and per-share data)
    2007
              
              
              2006Interest
      income:Loans (including fees)
              
              $
              11,824
              
              
              $
              10,341Investment securities
              
              
              1,038
              
              
              
              825Federal funds sold
              
              
              583
              
              
              
              289Other interest income
              
              
              42
              
              
              
              35Total interest income
              
              
              13,487
              
              
              
              11,490Interest
      expense:Deposits
              
              
              5,977
              
              
              
              4,559Borrowings
              
              
              763
              
              
              
              534Total interest expense
              
              
              6,740
              
              
              
              5,093Net interest
      income
              
              
              6,747
              
              
              
              6,397Provision for
      loan losses
              
              
              1,439
              
              
              
              471Net interest
      income after provision for loan losses
              
              
              5,308
              
              
              
              5,926Noninterest
      income:Service charges on demand deposits
              
              
              573
              
              
              
              422Fees on loan sold
              
              
              395
              
              
              
              386Net gain on sales of invesetment securities available for sale
              
              
              6
              
              
              
              23Other
              
              
              96
              
              
              
              167Total noninterest income
              
              
              1,070
              
              
              
              998Noninterest
      expense:Salaries and employee benefits
              
              
              2,867
              
              
              
              2,752Occupancy costs
              
              
              710
              
              
              
              802Premises and equipment depreciation and maintenance
              
              
              325
              
              
              
              241Data processing fees
              
              
              644
              
              
              
              502Office supplies and postage
              
              
              203
              
              
              
              193Advertising and promotion
              
              
              159
              
              
              
              144Legal and professional
              
              
              308
              
              
              
              176Director's fees
              
              
              127
              
              
              
              115Loan expense
              
              
              245
              
              
              
              366Other
              
              
              543
              
              
              
              493Total noninterest expense
              
              
              6,131
              
              
              
              5,784Income before
      income taxes
              
              
              247
              
              
              
              1,140Income
      taxes
              
              
              4
              
              
              
              358Net income
              
              $
              243
              
              
              $
              782Earnings per
      share:Basic
              
              $
              0.16
              
              
              $
              0.63Diluted
              
              $
              0.16
              
              
              $
              0.57
 The
accompanying notes are an integral part of these consolidated financial
statements.
 27


TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY


Consolidated
Statements of Comprehensive Income
 For the
Years Ended December 31, 2007 and 2006
 (amounts
in thousands, except share and per-share data)













2007
            
            
            2006Net
      income
            
            $
            243
            
            
            $
            782Other
      comprehensive income, net of tax:Unrealized
      gains on investment securitiesavailable
      for sale
            
            
            82
            
            
            
            88Reclassification adjustment for net gains included in net
      income
            
            
            (6)
            
            
            
            (23)Income taxes associated with realized and unrealized gains/losses on

              investment securities available
      for sale
            
            
            (28)
            
            
            
            (24)Other comprehensive income, net of tax
            
            
            48
            
            
            
            41Comprehensive income
            
            $
            291
            
            
            $
            823







The
accompanying notes are an integral part of these consolidated financial
statements.
















28


TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY


Consolidated
Statements of Changes in Shareholders' Equity
 For the
Years Ended December 31, 2007 and 2006
 (amounts
in thousands, except share and per-share data)























Common
              Stock
            
            
            Treasury
              Stock
            
            
            Capital
      in
              Excess of
              Par Value
            
            
            Retained
              Earnings
            
            
            Accumulated
              Other Com-
              prehensive
              Income (loss)
            
            
            Total
              Shareholders'
              EquityBalance,
      January 1, 2006
            
            $
            539
            
            
            $
            --
            
            
            $
            6,610
            
            
            $
            2,968
            
            
            $
            (111
            )
            
            $
            10,006Net
      income
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            782
            
            
            
            --
            
            
            
            782Other
      comprehensive income
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            41
            
            
            
            41Stock split (2
      for 1)
            
            
            541
            
            
            
            --
            
            
            
            (541)
            
            
            
            --
            
            
            
            --
            
            
            
            --Issuance
      of common stock for

              director’s fees in lieu of
      cash
            
            
            5
            
            
            
            --
            
            
            
            94
            
            
            
            --
            
            
            
            --
            
            
            
            99Proceeds from
      common stockoffering
            
            
            416
            
            
            
            --
            
            
            
            5,078
            
            
            
            --
            
            
            
            --
            
            
            
            5,494Stock-based
      compensation
            
            
            --
            
            
            
            --
            
            
            
            72
            
            
            
            --
            
            
            
            --
            
            
            
            72Common
      stock options exercised

              (760 shares at $8 per
      share)
            
            
            --
            
            
            
            --
            
            
            
            6
            
            
            
            --
            
            
            
            --
            
            
            
            6Balance,
      December 31, 2006
            
            
            1,501
            
            
            
            --
            
            
            
            11,319
            
            
            
            3,750
            
            
            
            (70)
            
            
            
            16,500Net
      income
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            243
            
            
            
            --
            
            
            
            243Other
      comprehensive income
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            48
            
            
            
            48Cash dividends
      paid
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (118)
            
            
            
            --
            
            
            
            (118)Stock
      dividends issued through
              dividend reinvestment
      plan
            
            
            7
            
            
            
            --
            
            
            
            100
            
            
            
            (107)
            
            
            
            --
            
            
            
            --Issuance
      of stock in lieu ofdirector’s fees
            
            
            2
            
            
            
            29
            
            
            
            32
            
            
            
            --
            
            
            
            --
            
            
            
            63Stock-based
      compensation
            
            
            --
            
            
            
            --
            
            
            
            37
            
            
            
            --
            
            
            
            --
            
            
            
            37Purchase of
      treasury stock
            
            
            --
            
            
            
            (36)
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (36)Balance,
      December 31, 2007
            
            $
            1,510
            
            
            $
            (7)
            
            
            $
            11,488
            
            
            $
            3,768
            
            
            $
            (22)
            
            
            $
            $16,737



















29


TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY


Consolidated
Statements of Cash Flows
 For the
Years Ended December 31, 2007 and 2006
 (amounts
in thousands, except share and per-share data)






2007
            
            
            2006Cash
      flows from operating activities:Net income
            
            $
            243
            
            
            $
            782Adjustments
      to reconcile net income to net cash

              provided by operating
      activities:Provision for loan
      losses
            
            
            1,439
            
            
            
            471Depreciation
            
            
            334
            
            
            
            301Deferred income tax
      (benefit) expense
            
            
            (133)
            
            
            
            8Increase (decrease)
      in unearned loan fees
            
            
            (63)
            
            
            
            12Net
      amortization of premiums and discounts oninvestment
      securities
            
            
            43
            
            
            
            25FHLB stock
      dividends
            
            
            (69)
            
            
            
            (35)Net gain on sales of
      investment securities available for sale
            
            
            (6)
            
            
            
            (23)Proceeds from sales
      of loans
            
            
            17,832
            
            
            
            646Mortgage loans
      originated
            
            
            (18,160)
            
            
            
            --Increase in mortgage
      loans originated and sold
            
            
            --
            
            
            
            (425)Fees on loans
      sold
            
            
            (395)
            
            
            
            (386)Gain on sales of
      foreclosed real estate
            
            
            (16)
            
            
            
            --Stock-based
      compensation
            
            
            37
            
            
            
            72Issuance of stock in
      lieu of directors fees
            
            
            63
            
            
            
            100Net
      (increase) decrease in:Accrued interest
      receivable
            
            
            (69)
            
            
            
            (272)Prepaid expenses and other
      assets
            
            
            1,226
            
            
            
            (58)Net increase
      (decrease) in:Accrued interest
      payable
            
            
            (65)
            
            
            
            495Other
      liabilities
            
            
            (167)
            
            
            
            60Net cash provided by
      operating activities
            
            
            2,074
            
            
            
            1,773Cash
      flows from investing activities:Investment
      securities available for sale:Sales
            
            
            932
            
            
            
            1,106Purchases
            
            
            (17,075)
            
            
            
            (6,089)Maturities
            
            
            2,167
            
            
            
            500Principal repayments
      received
            
            
            1,253
            
            
            
            3,111Net increase in
      loans
            
            
            (5,917)
            
            
            
            (33,907)Purchases of premises
      and equipment
            
            
            (2,338)
            
            
            
            --Purchases of land for
      future development
            
            
            --
            
            
            
            (1,104)Proceeds from sales
      of foreclosed real estate
            
            
            13
            
            
            
            --Net cash used
      in investing activities
            
            $
            (20,965)
            
            
            $
            (36,383)




The
accompanying notes are an integral part of these consolidated financial
statements.





30


TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY


Consolidated
Statements of Cash Flows (Continued)
 For the
Years Ended December 31, 2007 and 2006
 (amounts
in thousands, except share and per-share data)
      2007
              
              
              2006Cash
      flows from financing activities:Net Increase
      in deposits
              
              $
              9,833
              
              
              $
              28,519Net Increase
      in securities sold under agreements to repurchase
              
              
              558
              
              
              
              30Net Increase
      in advances from Federal Home Loan Bank
              
              
              5,950
              
              
              
              4,000Purchase of
      treasury stock
              
              
              (36)
              
              
              
              --Decrease in
      obligation under capital lease
              
              
              (24)
              
              
              
              (23)Cash dividends
      paid
              
              
              (118)
              
              
              
              --Proceeds from
      issuance of common stock
              
              
              --
              
              
              
              5,499Net cash provided by
      financing activities
              
              $
              16,163
              
              
              $
              38,025Net
      increase (decrease) in
                Cash and cash
      equivalents
              
              
              (2,728)
              
              
              
              3,415Cash and cash
      equivalents at beginning of year
              
              
              15,167
              
              
              
              11,752Cash and cash
      equivalents at end of year
              
              $
              12,439
              
              
              $
              15,167Supplementary
      disclosures of cash flow information:Cash
      paid during the year for:Interest
              
              $
              5,977
              
              
              $
              4,598Income
      taxes
              
              $
              158
              
              
              $
              314Supplementary
      disclosures of noncash investing and financing
activities:Acquisition of foreclosed real estate
              
              $
              363
              
              
              $
              507Loans
      originated on sale of foreclosed real estate
              
              $
              510
              
              
              $
              --Issuance of common stock through dividend reinvestment plan
              
              $
              107
              
              
              $
              --Change
      in unrealized gain/loss on investment securities available
      for sale
              
              $
              74
              
              
              $
              65Change
      in deferred taxes associated with unrealizedgain/loss on
      investment securities available for sale
              
              $
              28
              
              
              $
              24Change
      in net unrealized gain/loss on investment securities
      available for sale
              
              $
              48
              
              
              $
              41





The
accompanying notes are an integral part of these consolidated financial
statements.








31
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


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
main office in Oak Ridge, Tennessee and four branch offices.  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.





NOTE 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES





Reclassifications - Certain
items in the 2006 consolidated financial statements have been reclassified to
conform with the 2007 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 on a trade date basis. Declines in the fair value
of securities below their cost that are other than temporary are reflected as
realized losses in the income statement.





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.





32
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


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 the lower of cost or market.





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.





33
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


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 years ended December 31, 2007 and 2006
stock option expense of $37 and $72, respectively was recorded in the income
statement.  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, 2007, the Company had $4 of
unrecognized stock option expense which will be recognized over 1
year.





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.




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.




34
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





New Accounting Pronouncements– In July 2006, the Financial Accounting Standards Board (“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 adopted Interpretation No. 48 effective January 1, 2007, resulting in no
adjustment to beginning retained earnings.




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
does not anticipate that Statement 157 will have a material impact on its
consolidated financial statements.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”.   This statement
permits entities to choose to measure many financial instruments and certain
other items at fair value.  The objective of this standard is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions.  This statement is effective as of the beginning of fiscal
years beginning after November 15, 2007, with early adoption permitted under
certain circumstances.  The Company did not choose to early adopt this
standard and does not anticipate that Statement 159 will have a material impact
on its consolidated financial statements.




35
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


NOTE 3 - INVESTMENT
SECURITIES





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





Securities
      Available for SaleGross
            
            
            GrossAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            EstimatedDecember
      31, 2007
            
            Cost
            
            
            Gains
            
            
            Losses
            
            
            Fair
      ValueU.S.
      Government agencies
            
            $
            5,250
            
            
            $
            18
            
            
            $
            (1
            )
            
            $
            5,267Mortgage-backed
      and related securities
            
            
            14,985
            
            
            
            67
            
            
            
            (27
            )
            
            
            15,025Obligations
      of states and political subdivisions
            
            
            11,837
            
            
            
            51
            
            
            
            (84
            )
            
            
            11,804Equity
      securities
            
            
            854
            
            
            
            -
            
            
            
            (60
            )
            
            
            794Total
      securities available for sale
            
            $
            32,926
            
            
            $
            136
            
            
            $
            (172
            )
            
            $
            32,890Securities
      Available for SaleGross
            
            
            GrossAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            EstimatedDecember
      31, 2006
            
            Cost
            
            
            Gains
            
            
            Losses
            
            
            Fair
      ValueU.S.
      Government 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




The
amortized cost and estimated fair value of debt securities as of December 31,
2007, by contractual maturity, are as follows:





Available
      for SaleEstimatedAmortized
            
            
            FairCost
            
            
            ValueDue
      in one year or less
            
            $
            2,128
            
            
            $
            2,128Due
      after one year through five years
            
            
            2,783
            
            
            
            2,807Due
      after five years through ten years
            
            
            3,417
            
            
            
            3,439Due
      after ten years
            
            
            9,613
            
            
            
            9,49117,941
            
            
            
            17,865Mortgage-backed
      and related securities
            
            
            14,985
            
            
            
            15,025$
            32,926
            
            
            $
            32,890





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 investment securities classified as available for sale totaled
$932 during the year ended December 31, 2007 ($1,106 in 2006). Gross gains
of $6 ($23 in 2006) were realized by the Bank during the year ended
December 31, 2007.





36
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


NOTE
3 - INVESTMENT SECURITIES (Continued)





Investments
with a total estimated fair value (which approximates book value) of
approximately $10,650 as of December 31, 2007 ($8,085 in 2006) were pledged
to secure deposits of public and private funds.





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, 2007 and
2006.












Less
      Than 12 Months
            
            
            12
      Months or More
            
            
            TotalFair
              Value
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
              value
            
            
            Gross
              Unrealized
              LossesDecember 31, 2007U.S.
      government agencies
            
            $
            --
            
            
            $
            --
            
            
            $
            2,017
            
            
            $
            (1)
            
            
            $
            2,017
            
            
            $
            (1)Mortgage-backed
      and relatedsecurities
            
            
            4,902
            
            
            
            (9)
            
            
            
            1,273
            
            
            
            (18)
            
            
            
            6,175
            
            
            
            (27)Obligations
      of states and politicalsubdivisions
            
            
            4,664
            
            
            
            (66)
            
            
            
            1,925
            
            
            
            (18)
            
            
            
            6,589
            
            
            
            (84)Equity
      Securities
            
            
            293
            
            
            
            (60)
            
            
            
            --
            
            
            
            --
            
            
            
            293
            
            
            
            (60)Total
      temporarily impairedsecurities
            
            $
            9,859
            
            
            $
            (135)
            
            
            $
            5,215
            
            
            $
            (37)
            
            
            $
            15,074
            
            
            $
            (172)December
      31, 2006:U.S.
      government agencies
            
            $
            1,250
            
            
            $
            (2)
            
            
            $
            4,945
            
            
            $
            (62)
            
            
            $
            5,940
            
            
            $
            (64)Mortgage-backed
      and relatedsecurities
            
            
            1,451
            
            
            
            (13)
            
            
            
            3,767
            
            
            
            (76)
            
            
            
            5,218
            
            
            
            (89)Obligations
      of states and politicalsubdivisions
            
            
            758
            
            
            
            (11)
            
            
            
            2,051
            
            
            
            (21)
            
            
            
            2,809
            
            
            
            (32)Total
      temporarily impairedsecurities
            
            $
            3,459
            
            
            $
            (26)
            
            
            $
            10,763
            
            
            $
            (159)
            
            
            $
            13,967
            
            
            $
            (185)










Management
believes that all of the Bank’s gross unrealized losses are a result of recent,
normal market fluctuations.  Therefore, the Bank’s unrealized losses
are considered temporary in nature and no permanent adjustments have been made
to the carrying values of its investment securities.








37
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


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, and Roane County
areas.  A summary of loans as of December 31, 2007 and 2006 is as
follows:





2007
            
            2006Loans
      secured by real estate:Commercial
      properties
            $
            12,528
            $
            15,788Construction
      and land development
            
            33,345
            
            36,561Residential
      and other properties
            
            47,699
            
            41,444Total
      loans secured by real estate
            
            93,572
            
            93,793Commercial
      and industrial loans
            
            29,442
            
            23,308Consumer
      loans and other
            
            25,298
            
            25,880148,312
            
            142,981Less:  Allowance
      for loan losses
            
            (2,284)
            
            (1,578)Unearned
      loan fees
            
            (77)
            
            (140)$
            145,951
            $
            141,263





Included
in consumer loans and other shown above are deposit account balances totaling
approximately $406 which were in overdraft status as of December 31, 2007 ($327
in 2006).





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 $1,102 as of
December 31, 2007 ($1,616 as of December 31, 2006). Unadvanced lines of credit
and commitments to extend credit were approximately $34,446 as of December 31,
2007 ($34,309 as of December 31, 2006).  Of the total outstanding
letters of credit and unadvanced lines and commitments as of December 31,
2007 approximately $20,690, were secured primarily by real estate ($28,169 in
2006).





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:





2007
            
            2006Loans
      at beginning of year
            $
            281
            $
            1,092Disbursements
            
            233
            
            493Repayments
            
            (198)
            
            (1,304)Loans
      at end of year
            $
            316
            $
            281





38
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


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





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





2007
            
            2006Balance,
      beginning of year
            $
            1,578
            $
            1,406Charge-offs
            
            (757)
            
            (341)Recoveries
            
            24
            
            42Provision
      - charged to expense
            
            1,439
            
            471Balance,
      end of year
            $
            2,284
            $
            1,578





The Bank
had approximately $1,016 in 2007 ($19 in 2006) of loans past due ninety days or
more and  still accruing interest, and the Bank has approximately
$3,230 in loans on which the accrual of interest had been discontinued as of
December 31, 2007 ($326 in 2006).





As of
December 31, 2007, the Bank had approximately $3,230 in loans specifically
classified as impaired ($326 in 2006).  The allowance for loan losses
related to impaired loans amounted to approximately $585 as of December 31, 2007
($54 in 2006).





Impaired
loans were as follows:





2007
            
            2006Loans
      with allowance allocated
            $
            3,230
            $
            326Amount
      of allowance allocated
            
            585
            
            47Average
      balance during the year
            
            830
            
            485Interest
      income not recognized during impairment
            
            172
            
            39




There was no interest
income recognized on these loans during 2007 or 2006.





NOTE
5 - PREMISES AND EQUIPMENT





A summary
of premises and equipment is as follows:





2007
            
            2006Land
            $
            1,677
            $
            1,198Buildings
            
            5,158
            
            3,461Leasehold
      improvements
            
            123
            
            123Furniture,
      fixtures, and equipment
            
            1,928
            
            1,575Construction
      in progress
            
            4
            
            1968,890
            
            6,553Less
      accumulated depreciation
            
            (1,754)
            
            (1,421)$
            7,136
            $
            5,132





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 lease
was $39 in 2007 ($39 in 2006).






39
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006




NOTE
6 - DEPOSITS





A summary
of deposits is as follows:





2007
            
            2006Noninterest-bearing
      demand accounts
            $
            16,727
            $
            13,944Interest-bearing
      accountsDemand
      accounts
            
            38,846
            
            37,191Savings
      accounts
            
            3,522
            
            3,729Term
      deposits:Less
      than $100,000
            
            55,003
            
            56,555$100,000
      or more
            
            49,087
            
            41,933Total
      interest-bearing accounts
            
            146,458
            
            139,408Total
      deposits
            $
            163,185
            $
            153,352








As of
December 31, 2007, the scheduled maturities of certificates of deposits are as
follows:





2008
            $
            81,4682009
            
            17,1772010
            
            3,0232011
            
            1,8322012
            
            535Thereafter
            
            55$
            104,090





NOTE
7 – 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 $811 as of December 31, 2007 ($303 in 2006).





Securities
sold under agreements to repurchase averaged approximately $637 during 2007
($359 during 2006). The maximum amount outstanding at any month-end during 2007
was approximately $1,215 ($409 during 2006).





Fed Funds
Purchased





The Bank
maintains a federal funds line of credit with five of its correspondent
commercial banks.  These lines allow for total borrowings up to a
maximum amount of $18.5 million.  Advances are repaid on the next
business day with interest.  There were no borrowings outstanding on
these lines at December 31, 2007.


40
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


NOTE
7 – BORROWINGS (Continued)





Advances from the Federal
Home Loan Bank





The
following table is a maturity schedule of advances from the Federal Home Loan
Bank (“FHLB”) as of December 31, 2007:





Date
      of
              Advance
            
            Interest
      Rate
            
            Next
      Call/
              Prepayment
      Date
            
            Final
              Maturity
      Date
            
            Amount
              Outstanding
              at
      12/31/079/21/2000
            
            6.22%
            
            3/22/2008
            
            9/22/2010
            $
            1,00012/27/2000
            
            5.00%
            
            3/27/2008
            
            12/27/2010
            
            1,0008/10/2001
            
            5.09%
            
            2/10/2008
            
            8/10/2011
            
            1,0009/20/2006
            
            5.30%
            
            None
            
            12/19/2008
            
            5009/20/2006
            
            5.24%
            
            None
            
            9/18/2009
            
            5009/20/2006
            
            5.31%
            
            None
            
            6/20/2008
            
            50011/30/2006
            
            4.39%
            
            3/1/2008
            
            11/30/2011
            
            3,00012/4/2006
            
            4.90%
            
            3/4/2008
            
            12/4/2008
            
            1,0008/21/2007
            
            4.04%
            
            8/21/2008
            
            8/21/2017
            
            3,0009/11/2007
            
            3.95%
            
            9/11/2008
            
            9/11/2017
            
            2,00012/17/2007
            
            3.90%
            
            12/17/2010
            
            12/17/2014
            
            5,000$
            18,500





Interest
expense associated with the advances from the FHLB totaled $602 for the year
ended December 31, 2007 ($384 in 2006).  Pursuant to collateral
agreements with the FHLB, the advances are secured by certain available for sale
securities, and certain first mortgage loans and home equity lines of
credit.  The Bank has a Cash Management Advance (CMA) agreement with
the FHLB with maximum borrowings of $7,100 as of December 31, 2007.





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, 2007) is included in “Prepaid
expense and other assets” on the consolidated balance sheets.





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


41
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


NOTE 7 – BORROWINGS(Continued)





Obligation Under Capital
Lease





The
present value of the Bank’s minimum lease payments under capital lease was $171
at December 31, 2007 ($195 at December 31, 2006). See Note 15.





NOTE
8 - INTEREST EXPENSE





A summary
of interest expense is as follows:





2007
            
            2006Demand
      deposits
            $
            846
            $
            881Term
      deposits
            
            5,131
            
            3,678FHLB
      advances
            
            602
            
            384Subordinated
      debentures
            
            135
            
            135Capital
      lease obligation
            
            6
            
            7Repurchase
      agreements and federal funds purchased
            
            20
            
            8Total
      interest expense
            $
            6,740
            $
            5,093








NOTE
9 - 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:





2007
            2006Percent
            
            Percentof
            
            ofPretax
            
            PretaxAmount
            Income
            Amount
            IncomeFederal
      income tax at statutory rate
            $                  
      84
            34.0%
            $              
      388
            34.0 %Tax
      exempt interest and dividends
            (104)
            (42.1)
            (91)
            (8.0)State
      income tax and other , net
            24
            10.1
            61
            5.4$                    4
            2.0%
            $             
      358
            31.4%Income
      taxes consist of:Current
      federal
            $                 
      94
            
            $               
      286Current
      state
            43
            
            64Deferred
      federal
            (133)
            
            6Deferred
      state
            -
            
            2$                   
      4
            
            $               
      358








42
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


NOTE
9 – 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:





2007
            
            2006Deferred
      tax assets:Allowance
      for loan losses
            $
            731
            $
            506Deferred
      loan fees
            
            31
            
            57Unrealized
      holding losses on securities available for sale
            
            13
            
            43Organizational
      costs
            
            -
            
            1Total
      deferred tax assets
            
            775
            
            607Deferred
      tax liabilities:Depreciation
            
            178
            
            166FHLB
      stock dividends
            
            77
            
            77Discount
      accretion
            
            29
            
            20Capitalized
      lease
            
            41
            
            32Prepaid
      expenses
            
            48
            
            20State
      tax
            
            21
            
            14Total
      deferred tax liabilities
            
            394
            
            329Net deferred tax assets
            $
            381
            $
            278





The Company
has adopted the provisions of Financial Accounting Standards Board ("FASB")
Interpretation No. 48 ("FIN 48"). There was no material impact from the adoption
of FIN 48. It is the Company's policy to recognize interest and penalties
associated with uncertain tax positions as components of income taxes. There
were no interest or penalties accrued during the year. The Company's federal and
state income tax returns are subject to examination for the years 2004, 2005 and
2006.





NOTE
10 - PROFIT SHARING PLAN





The bank
has a profit sharing plan which allows all employees to contribute up to the
maximum 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 $50
and $35 for the years ended December 31, 2007 and 2006,
respectively.








NOTE
11 - 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.






43
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


NOTE
11 - 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, 2007, that the
Bank meets all capital adequacy requirements to which it is
subject.





As of
December 31, 2007, 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.





To
      Be WellTo
      Comply With
            
            Capitalized
      UnderMinimum
      Capital
            
            Prompt
      CorrectiveActual
            
            Requirements
            
            Action
      ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            RatioAs
      of December 31, 2007:Total
      Capital (to Risk-Weighted Assets)
            $
            20,526
            
            13.1%
            $
            12,525
            
            8.0%
            $
            15,657
            
            10.0%Tier
      I Capital (to Risk-Weighted Assets)
            $
            18,564
            
            11.9%
            $
            6,266
            
            4.0%
            $
            9,399
            
            6.0%Tier
      I Capital (to Average Assets)
            $
            18,564
            
            9.5%
            $
            7,825
            
            4.0%
            $
            9,781
            
            5.0%As
      of December 31, 2006:Total
      Capital (to Risk-Weighted Assets)
            $
            19,784
            
            13.4%
            $
            11,807
            
            8.0%
            $
            14,759
            
            10.0%Tier
      I Capital (to Risk-Weighted Assets)
            $
            18,207
            
            12.3%
            $
            5,903
            
            4.0%
            $
            8,855
            
            6.0%Tier
      I Capital (to Average Assets)
            $
            18,207
            
            10.1%
            $
            7,233
            
            4.0%
            $
            9,042
            
            5.0%





NOTE
12 – 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 No. 123”),” and supersedes APB No. 25, “Accounting to Stock
Issue 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 the measurement of the cost of
employee services received in exchange for an award based of 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.  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.








44
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006





NOTE
12 – STOCK BASED COMPENSATION (Continued)


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 boards of directors has discretion concerning which
eligible persons shall be granted options, the term of each granted option, and
the number of shares to 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 was 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 vested over a
four-year period and have an exercise price which is equal to the fair value of
the stock on the date the options were granted.  In 2006, options for
760 shares were exercised.





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 was estimated on the date of grant using the
Black-Scholes option-pricing model as follows:





2005Dividend
      yield
            
            
            
            1.37%Expected
      life
            
            
            
            9
      yearsExpected
      volatility
            
            
            
            13.65%Risk-free
      interest rate
            
            
            
            4.01%








45
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


NOTE
12 – STOCK BASED COMPENSATION (Continued)





A summary
of the status of the Company’s stock option plans is presented
below:


2007
            
            2006Weighted
            
            
            
            WeightedAverage
            
            
            
            AverageExercise
            
            
            
            ExerciseShares
            
            Price
            
            Shares
            
            PriceOutstanding
      at beginning of year
            
            102,200
            $
            11.82
            
            107,960
            $
            11.84Granted
            
            0
            
            
            
            0
            
            0.00Exercised
            
            0
            
            
            
            (760)
            
            8.00Rescinded
            
            0
            
            
            
            0
            
            0.00Forfeited
            
            (5,000)
            $
            13.00
            
            (5,000)
            
            13.00Outstanding
      at end of year
            
            97,200
            $
            11.76
            
            102,200
            $
            11.82Options
      exercisable at year-end
            
            82,200
            $
            11.53
            
            67,200
            $
            11.20Weighted-average
      fair value of options granted
              during
      the year
            
            N/A
            
            
            
            N/A





Information
pertaining to options outstanding at December 31, 2007 is as
follows:





Options
      Outstanding
            
            Options
      ExercisableWeightedAverage
            
            Weighted
            
            
            
            WeightedRemaining
            
            Average
            
            
            
            AverageRange
      of
            
            Number
            
            Contractual
            
            Exercise
            
            Number
            
            ExerciseExercise
      Prices
            
            Outstanding
            
            Life
            
            Price
            
            Exercisable
            
            Price$8.00
      - $13.00
            
            97,200
            
            $
      5.14
            $
            11.76
            
            82,200
            $
            11.53





As of
December 31, 2007, there was $4,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements, which is expected
to be recognized over 1 year.  The aggregate intrinsic value of
options (which is the amount by which the stock price exceeded the exercise
price of the options) outstanding as of December 31, 2007 was approximately
$0.


46
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


NOTE
13 – 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
            
            2007
            
            2006Net
      income
            $
            243
            $
            782Weighted
      average common shares outstanding
            
            1,509
            
            1,214Basic
      earnings per share
            $
            0.16
            $
            0.64Diluted
      earnings per share
            
            2007
            
            2006Net
      income
            $
            243
            $
            782Weighted
      average common shares outstanding
            
            1,509
            
            1,214Add:
      dilutive effects of assumed conversions and exercise of stock
      options
            
            --
            
            13Weighted
      average common and dilutive potential common shares
      outstanding
            
            1,509
            
            1,227Diluted
      Earnings per Share
            $
            0.16
            $
            0.63





No stock
options were excluded from the earnings per share calculation for 2006.  In
2007, all options were considered antidilutive and were excluded from the
earnings per share calculation.





NOTE
14 - LEASE COMMITMENTS/RELATED PARTY





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 thich the
Cedar Bluff branch operates.  This lease has been classified as an
operating lease for financial accounting purposes.  The initial tern
of the lease is for twenty years with four renewal option periods of five
years.  The bank has other leases with are classified as operating
leases and provide for monthly payments over 12 to 180 months.  Total
lease expense under noncancellable operating leases for the years ended December
31, 2007 and 2006 totaled $106 and $97 respectively.





The
following is a schedule by years of future minimum rental payments required
under all noncancellable operating and capital leases as of December 31,
2007:


Capital
            OperatingLease
            Leases
            Total2008
            $                   
      33
            $                     
      92
            $                   
      1252009
            36
            89
            1252010
            36
            87
            1232011
            36
            82
            1182012
            36
            79
            115Thereafter
            10
            504
            514Total
      minimum lease payments
            187
            $                   
      933
            $                 1,120Less
      amount representing interest
            16Present
      value of minimum lease payments
            $                  
      171





47
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


NOTE
15 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK





The
Bank's primary business activity is with customers located within East
Tennessee.  As of December 31, 2007 the Bank had concentrations of
loans secured by commercial properties and residential and other properties as
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 collateral loan-to-value ratios.





NOTE
16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS





Statement
of Financial Accounting Standards No. 107, “Disclosures about Fair Value of
Financial Instruments” (SFAS 107), requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value.  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 available for
sale- Quoted market prices are used to determine the estimated fair value
of investment securities.





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.





48
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


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





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 2007 and 2006, the book value approximates fair value since interest rates
would not have changed significantly since this obligation 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, 2007 and 2006.





The
recorded book value and estimated fair value of the Bank's financial instruments
as of December 31, 2007 and 2006 are as follows:


2007
            
            2006Recorded
            
            Estimated
            
            Recorded
            
            EstimatedBook
      Value
            
            Fair
      Value
            
            Book
      Value
            
            Fair
      ValueFINANCIAL
      ASSETS:Cash
      and cash equivalents
            $
            12,439
            $
            12,439
            $
            15,167
            $
            15,167Investment
      securities available for sale
            $
            32,890
            $
            32,890
            $
            20,156
            $
            20,156Loans
      held for sale
            $
            1,511
            $
            1,511
            $
            788
            $
            788Net
      loans
            $
            145,951
            $
            147,760
            $
            141,263
            $
            143,270FINANCIAL
      LIABILITIES:Deposits
            $
            163,185
            $
            164,315
            $
            153,352
            $
            154,231Securities
      sold under agreements to
              repurchase
            $
            811
            $
            811
            $
            303
            $
            303Advances
      from federal home loan bank
            $
            18,500
            $
            18,926
            $
            12,500
            $
            12,504Subordinated
      debentures
            $
            2,062
            $
            2,062
            $
            2,062
            $
            2,226Obligation
      under capital lease
            $
            171
            $
            171
            $
            195
            $
            195





49
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


NOTE
17 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY





Condensed
financial information pertaining only to Tennessee Valley Financial Holdings,
Inc. is as follows (amounts in thousands):





CONDENSED
BALANCE SHEETS


As
      of December 31,2007
            
            2006Assets:Cash
      in bank
            $
            90
            $
            264Investment
      in common stock of TNBank
            
            18,541
            
            18,114Other
      assets
            
            211
            
            184Total
      assets
            $
            18,842
            $
            18,562Liabilities:Subordinated
      debentures
            $
            2,062
            $
            2,062Other
      liabilities
            
            43
            
            -Total
      liabilities
            
            2,105
            
            2,062Shareholders'
      equity:Common
      stock
            
            1,510
            
            1,501Treasury
      stock
            
            (7)
            
            -Capital
      in excess of par value
            
            11,488
            
            11,319Retained
      earnings
            
            3,746
            
            3,680Total
      shareholders' equity
            
            16,737
            
            16,500Total
      liabilities and shareholders’ equity
            $
            18,842
            $
            18,562








CONDENSED
STATEMENTS OF INCOME





For
      the years ended December 31,2007
            
            2006Income
      - dividends from TNBank
            $
            135
            $
            -Operating
      expenses
            
            (381)
            
            (321)Income
      before income tax benefit and equity in
              undistributed
      net income of TNBank
            
            (246)
            
            (321)Income
      tax benefit
            
            146
            
            123Equity
      in undistributed net income of TNBank
            
            343
            
            980Net
      income
            $
            243
            $
            782





50
 TENNESSEE
VALLEY FINANCIAL HOLDINGS, INC.  AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007 and 2006


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





CONDENSED
STATEMENTS OF CASH FLOWS





For
      the Years Ended December 31,2007
            
            2006Cash
      Flows From Operating Activities:Net
      income
            $
            243
            $
            782Adjustments
      to reconcile net income tonet
      cash provided (used) by operating activities:Equity
      in undistributed net income of TNBank
            
            (343)
            
            (980)Stock-based
      compensation
            
            37
            
            72Issuance
      of stock in lieu of directors’ fees
            
            63
            
            100(Increase)
      decrease in other assets
            
            (27)
            
            (12)Increase
      in other liabilities
            
            43
            
            -Net cash provided (used) by
      operating activities
            
            16
            
            (38)Cash Flows From Investing
      Activities:Capital
      investment in TnBank
            
            (36)
            
            (5,269)Cash Flows From Financing
      Activities:Proceeds
      from issuance of common stock
            
            -
            
            5,498Purchase
      of treasury stock
            
            (36)
            
            -Cash
      dividends paid
            
            (118)
            
            -Net cash provided by (used in)
      financing activities
            
            (154)
            
            5,498Net
      Increase (Decrease) in Cash and Cash Equivalents
            
            (174)
            
            191Cash
      and Cash Equivalents, Beginning of Period
            
            264
            
            73Cash
      and Cash Equivalents, End of Period
            $
            90
            $
            264





51


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





Not
applicable.





ITEM 8A(T).  CONTROLS AND
PROCEDURES
 
 Evaluation of Disclosure Controls
and Procedures. We have carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including our subsidiary) required to be included in our periodic
Securities and Exchange Commission filings. No significant changes were made in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
 
 Management’s Report on Internal
Control Over Financial Reporting. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) and
15d-15(f) promulgated under the Exchange Act as a process designated by, or
under the supervision of, our principal executive and principal financial
officers and effected by our board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
 Pertain
  to the maintenance of records that in reasonable detail accurately and fairly
  reflectthe
  transactions and disposition of our assets;
        Provide
  reasonable assurance that transactions are recorded as necessary to permit
  preparationof
  financial statements in accordance with generally accepted accounting
  principles, andthat
  our receipts and expenditures are being made only in accordance with
  authorizationsof our
  management and directors; and
        Provide
  reasonable assurance regarding prevention or timely detection of unauthorizedacquisition,
  use or disposition of our assets that could have a material effect on
  the
            financial
  statements. Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
  Our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control – Integrated
Framework.
  Based
on our assessment, management believes that, as of December 31, 2007, our
internal control over financial reporting is effective based on those
criteria.
  This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
 Changes in Internal Control Over
Financial Reporting.





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 Kenneth F. Scarbro, Vice President and Chief
Financial Officer, 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 2008 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 2008 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 2008 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 2008 Proxy Statement.





52


PART
IV





ITEM
13 - EXHIBITS


3.1*          
Charter of Tennessee Valley Financial Holdings, Inc.


3.(ii)                      Bylaws,
as amended, of Tennessee Valley Financial Holdings, Inc.


21.1                      Subsidiaries
of Tennessee Valley Financial Holdings, Inc.





23.1                      Consent
of Independent Registered Public Accounting Firm





31.1
            Certification
      of Thomas E. Tuck, Chief Executive Officer of Tennessee Valley
      Financial Holdings, Inc., Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.


31.2
            Certification
      of Kenneth F. Scarbro, Chief 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, Chief Executive Officer of Tennessee Valley
      Financial Holdings, Inc., Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.


32.2
            Certification
      of Kenneth F. Scarbro, Chief 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 2008
Proxy Statement.


53


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:  March 31,
2008








­­­­­­­­­­­­­­


/s/ Kenneth F.
Scarbro                                                                                 
                   /s/ Thomas E. Tuck


Kenneth
F.
Scarbro                                                                                                          Thomas
E. Tuck


Vice
President
and                                                                                               
            President
and Chief


Chief
Financial
Officer                                                                                         
           Executive
Officer, Director


Date:  March
31,
2008                                                                         
                            Date:  March
31, 2008








/s/ J. Frank
Jamison                                                                                                 
      /s/
A.P. Cappiello


J. Frank
Jamison                                                                                                            
 A.P. Cappiello


Director                                                                                                                           
 Director


Date:  March
31,
2008                                                                                              
       Date:  March 31,
2008








/s/ Larry
Beeman                                                                                             
             /s/ Terry L. Kerbs


Larry
Beeman                                                                                                              
   Terry L. Kerbs


Director                                                                                                                           
Director


Date:  March
31,
2008                                                                                                  
  Date:  March 31, 2008








/s/ Thomas D.
Moye                                                                                                 
   /s/ William Robert
Witt


Dr.
Thomas D. Moye,
Jr.                                                                                              
William Robert Witt


Director                                                                                                                             Director


Date:  March
31,
2008                                                                                                    
Date:  March 31, 2008








54