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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-49912
 MOUNTAIN NATIONAL BANCSHARES, INC.
  Tennessee
    
    75-3036312(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 300 East Main Street, Sevierville, Tennessee
    
    37862(Address of principal executive offices)
    
    (Zip code)
 (865) 428-7990
    YesoNoþ
 Yes o No þ
 Yes þ No o
 Yes o No o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 Yes o No þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



MOUNTAIN NATIONAL BANCSHARES, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2010
 Table of Contents
 Item


    
    PageNumber


    
    NumberPart I1. Business
    
    
    11A. Risk Factors
    
    
    242. Properties
    
    
    353. Legal Proceedings
    
    
    364. Removed and Reserved
    
    
    36Part II5.  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    377. Managements Discussion and Analysis of Financial Condition  and Results of Operations
    
    
    388. Financial Statements and Supplementary Data
    
    
    709. Changes in and Disagreements with Accountants on   Accounting and Financial Disclosure
    
    
    719A. Controls and Procedures
    
    
    719B. Other Information
    
    
    73Part III10. Directors, Executive Officers and Corporate Governance
    
    
    7311. Executive Compensation
    
    
    7312. Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters
    
    
    7413. Certain Relationships and Related Transactions, and  Director Independence
    
    
    7414. Principal Accountant Fees and Services
    
    
    74Part IV15. Exhibits, Financial Statement Schedules
    
    
    74Signatures
    
    
    78Exhibit 10.3Exhibit 21Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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PART I
 
 ITEM 1.
    
    BUSINESS
 Forward-Looking Statements
    
    
    the effects of greater than anticipated deterioration in economic and business
conditions (including in the residential and commercial real estate construction and
development segment of the economy) nationally and in our local market;
    
    deterioration in the financial condition of borrowers resulting in significant
increases in loan losses and provisions for those losses;
    
    increased levels of non-performing and repossessed assets;
    
    lack of sustained growth in the economy in the Sevier County and Blount County,
Tennessee area;
    
    government monetary and fiscal policies as well as legislative and regulatory
changes, including changes in banking, securities and tax laws and regulations;
    
    the risks of changes in interest rates on the levels, composition and costs of
deposits, loan demand, and the values of loan collateral, securities, and interest
sensitive assets and liabilities;
    
    the effects of competition from a wide variety of local, regional, national and
other providers of financial, and investment services;
    
    the failure of assumptions underlying the establishment of reserves for possible
loan losses and other estimates;
  1




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
    
    the risks of mergers, acquisitions and divestitures, including, without limitation,
the related time and costs of implementing such transactions, integrating operations as
part of these transactions and the possible failure to achieve expected gains, revenue
growth and/or expense savings from such transactions;
    
    the effects of failing to comply with our regulatory commitments;
    
    changes in accounting policies, rules and practices;
    
    changes in technology or products that may be more difficult, or costly, or less
effective, than anticipated;
    
    the effects of war or other conflicts, acts of terrorism or other catastrophic
events that may affect general economic conditions;
    
    results of regulatory examinations;
    
    the remediation efforts related to the Companys material weakness in internal
control over financial reporting;
    
    the ability to raise additional capital;
    
    the prepayment of FDIC insurance premiums and higher FDIC assessment rates;
    
    the effects of negative publicity;
    
    the Companys recording of a further allowance related to its deferred tax asset;
and
    
    other factors and information described in this report and in any of our other
reports that we make with the Securities and Exchange Commission (the Commission)
under the Exchange Act.
  The Company
     2




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The Bank
  Our Banking Business
 General .
   3




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Market Areas .
 Lending Activities
 General
 Real Estate Lending
 Consumer Lending
 
    
    loans secured by junior liens on real estate, including home
improvement and home equity loans, which have an average maturity of about three
years and generally are limited to 80% of appraised value, and home equity lines
of credit;
 
    
    loans secured by personal property, such as automobiles, recreational
vehicles or boats, which typically have 36 to 60 month maturities;
 
    
    loans to our depositors secured by their time deposit accounts or
certificates of deposit;
 
    
    unsecured personal loans and personal lines of credit; and
 
    
    credit card loans.
   4




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Construction Lending
   Commercial Lending
  5




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Creditworthiness and Collateral
 Loan Originations
 Secondary Market Activities
    6




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Income from Lending Activities
 Loan Delinquencies and Defaults
 Investment Activities
  Sources of Funds
 General
 Deposits
  7




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Borrowings
 Financing
    8




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Competition
    Employees
  Seasonality
   9




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Supervision and Regulation
 Supervision and Regulation
   Bank Holding Company Regulation
    10




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11




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De novo
  Bank Regulation
    12




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13




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Community Reinvestment Act
     14




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Sarbanes-Oxley Act
  Payments of Dividends
   15




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Capital
   16




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17




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Regulatory Minimum to
    
    
    Regulatory Minimumbe Adequately Capitalized
    
    
    to be Well Capitalized
    
    
    Company
    
    
    BankTier 1 capital ratio
    
    4.0
    %
    
    
    6.0
    %
    
    
    11.87
    %
    
    
    11.97
    %Total capital ratio
    
    8.0
    %
    
    
    10.0
    %
    
    
    13.27
    %
    
    
    13.23
    %Leverage ratio
    
    3.0-5.0
    %
    
    
    5.0
    %
    
    
    8.34
    %
    
    
    8.41
    %
 FDICIA
   18




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Enforcement Policies and Actions
  Fiscal and Monetary Policy
   19




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FDIC Insurance Assessments
      20




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Other Laws and Regulations
   
    
    to conduct enhanced scrutiny of account relationships to guard against money laundering
and report any suspicious transaction;
 
    
    to ascertain the identity of the nominal and beneficial owners of, and the source of
funds deposited into, each account as needed to guard against money laundering and report
any suspicious transactions;
 
    
    to ascertain for any foreign bank, the shares of which are not publicly traded, the
identity of the owners of the foreign bank, and the nature and extent of the ownership
interest of each such owner; and
 
    
    to ascertain whether any foreign bank provides correspondent accounts to other foreign
banks and, if so, the identity of those foreign banks and related due diligence
information.
  21




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
    
    the development of internal policies, procedures, and controls;
 
    
    the designation of a compliance officer;
 
    
    an ongoing employee training program; and
 
    
    an independent audit function to test the programs.
    
 
  22




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
 
 
   23




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ITEM 1A.
    
    RISK FACTORS
 We have incurred significant losses in the last two years and could continue to sustain losses if
our asset quality declines.
  Our business is highly dependent upon conditions in the local real estate market and has been
adversely impacted by adverse developments in those markets.
  We have entered into a written agreement with, and are subject to a capital requirement from, the
OCC.
    24




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We anticipate that we will become subject to a cease and desist order with the OCC during the
second or third quarter of 2011.
   Our inability to accept, renew or roll over brokered deposits without the prior approval of the
FDIC could adversely affect our liquidity.
   25




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We may need to raise additional capital that may not be available to us.
  If our allowance for loan losses is not sufficient to cover actual loan losses, our losses will
continue.
   We have increased levels of other real estate owned, primarily as a result of foreclosures, and we
anticipate higher levels of foreclosed real estate expense.
   26




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Our loan portfolio includes a meaningful amount of real estate construction and development loans,
which have a greater credit risk than residential mortgage loans.
  We are geographically concentrated in Sevier County and Blount County, Tennessee, and changes in
local economic conditions, particularly the tourism industry, impact our profitability.
    27




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A portion of our loan portfolio is secured by homes that are being built for sale as vacation homes
or as second homes for out of market investors or homes that are used to generate rental income.
  If the value of real estate in our markets were to decline further or if appraisals do not
accurately reflect real estate values, a significant portion of our loan portfolio could become
under-collateralized, which could have a material adverse effect on us.
   28




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Negative publicity about financial institutions, generally, or about us or the Bank, specifically,
could damage the Banks reputation and adversely impact its liquidity, business operations or
financial results.
  The costs and effects of litigation, investigations or similar matters, or adverse facts and
developments related thereto, could materially affect our business, operating results and financial
condition.
  We may be required to pay significantly higher FDIC premiums or remit special assessments that
could adversely affect our earnings.
   29




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We reported a material weakness in our internal control over financial reporting, and if we are
unable to improve our internal controls, our financial results may not be accurately reported.
  Negative developments in the U.S. and local economy and in local real estate markets have adversely
impacted our operations and results and may continue to adversely impact our results in the future.
  Environmental liability associated with commercial lending could result in losses.
  Competition with other banking institutions could adversely affect our profitability.
   30




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Liquidity needs could adversely affect our results of operations and financial condition.
  Fluctuations in interest rates could reduce our profitability.
     31




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Our common stock is currently traded on the over-the-counter, or OTC, bulletin board and has
substantially less liquidity than the average stock quoted on a national securities exchange.
   Our business is dependent on technology, and an inability to invest in technological improvements
may adversely affect our results of operations and financial condition.
  Consumer protection initiatives related to the foreclosure process could affect our remedies as a
creditor.
   32




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National or state legislation or regulation may increase our expenses and reduce earnings.
  Implementation of the various provisions of the Dodd-Frank Act may increase our operating costs or
otherwise have a material affect on our business, financial condition or results of operations.
    33




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If the federal funds rate remains at current extremely low levels, our net interest margin, and
consequently our net earnings, may be negatively impacted
  We have a significant deferred tax asset and cannot give any assurance that it will be fully
realized.
  Holders of the Companys junior subordinated debentures have rights that are senior to those of the
Companys common shareholders.
   34




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If a change in control or change in management is delayed or prevented, the market price of our
common stock could be negatively affected.
  An investment in the Companys common stock is not an insured deposit.
  
 ITEM 2.
    
    PROPERTIES
         35




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ITEM 3.
    
    LEGAL PROCEEDINGS
  
 ITEM 4.
    
    REMOVED AND RESERVED
  36




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  Market Price RangePer ShareYear/Period
    
    High
    
    
    Low2010:
    
    $
    8.10
    
    
    $
    4.00First Quarter
    
    
    8.10
    
    
    
    5.75Second Quarter
    
    
    6.75
    
    
    
    5.10Third Quarter
    
    
    5.75
    
    
    
    5.00Fourth Quarter
    
    
    5.00
    
    
    
    4.002009:
    
    $
    16.75
    
    
    $
    8.00First Quarter
    
    
    16.75
    
    
    
    11.00Second Quarter
    
    
    16.50
    
    
    
    12.50Third Quarter
    
    
    15.00
    
    
    
    9.00Fourth Quarter
    
    
    10.50
    
    
    
    8.00
    Issuer Purchases of Equity Securities
   37




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  Critical Accounting Policies
    38




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Valuation of Investment Securities
    Allowance and Provision for Loan Losses
  Valuation of Other Real Estate Owned
   39




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Deferred Tax Asset Valuation
  Results of Operations for the Years Ended December 31, 2010 and 2009
 General Discussion of Our Results
  
    
    income received on interest-earning assets, such as loans and investment
securities; and
 
    
    payments we make on our interest-bearing sources of funds, such as deposits
and borrowings.
  
    
    increases or decreases in the volumes of interest-earning assets and
interest-bearing liabilities;
 
    
    increases or decreases in the average rates earned and paid on those assets
and liabilities;
 
    
    our ability to manage our interest-earning asset portfolio, which includes
loans;
 
    
    the availability and costs of particular sources of funds, such as
non-interest bearing deposits; and
 
    
    our ability to match liabilities to fund assets of similar maturities at a
profitable spread of rates earned on assets over rates paid on liabilities.
   40




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Net Income (Loss)
  Years Ended December 31,
    
    
    Dollar Change
    
    
    Percent Change2010
    
    
    2009
    
    
    2010 to 2009
    
    
    2010 to 2009Interest income
    
    $
    23,456
    
    
    $
    31,369
    
    
    $
    (7,913
    )
    
    
    -25.23
    %Interest expense
    
    
    10,702
    
    
    
    13,358
    
    
    
    (2,656
    )
    
    
    -19.88
    %Net interest income
    
    
    12,754
    
    
    
    18,011
    
    
    
    (5,257
    )
    
    
    -29.19
    %Provision for loan losses
    
    
    7,727
    
    
    
    11,673
    
    
    
    (3,946
    )
    
    
    -33.80
    %Net interest income after
provision for loan losses
    
    
    5,027
    
    
    
    6,338
    
    
    
    (1,311
    )
    
    
    -20.68
    %Noninterest income
    
    
    5,750
    
    
    
    4,863
    
    
    
    887
    
    
    
    18.24
    %Noninterest expense
    
    
    17,490
    
    
    
    19,217
    
    
    
    (1,727
    )
    
    
    -8.99
    %Net income (loss) before
income taxes
    
    
    (6,713
    )
    
    
    (8,016
    )
    
    
    1,303
    
    
    
    -16.25
    %Income tax expense (benefit)
    
    
    3,738
    
    
    
    (3,788
    )
    
    
    7,526
    
    
    
    -198.68
    %Net income (loss)
    
    $
    (10,451
    )
    
    $
    (4,228
    )
    
    $
    (6,223
    )
    
    
    147.19
    %Total revenues
    
    $
    29,206
    
    
    $
    36,232Total expenses
    
    
    39,657
    
    
    
    40,460Basic earnings (loss) per share
    
    
    (3.97
    )
    
    
    (1.61
    )Diluted earnings (loss) per share
    
    
    (3.97
    )
    
    
    (1.61
    )
   41




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2010
    
    
    2009First Quarter
    
    $
    329,113
    
    
    $
    (673,634
    )Second Quarter
    
    
    142,286
    
    
    
    (789,050
    )Third Quarter
    
    
    350,893
    
    
    
    1,028,162Fourth Quarter
    
    
    (11,273,470
    )
    
    
    (3,793,873
    )Annual Total
    
    $
    (10,451,178
    )
    
    $
    (4,228,395
    )
  Net Interest Income
 Average Balances, Interest Income, and Interest Expense
   42




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Average Balance Sheet and Analysis of Net Interest Income
for the Years Ended December 31, 2010 and 2009  (in thousands, except rates)
 Average Balance
    
    
    Income/Expense
    
    
    Yield/Rate2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Interest-earning assets:Loans (1)(2)
    
    $
    397,594
    
    
    $
    415,522
    
    
    $
    20,674
    
    
    $
    25,072
    
    
    
    5.20
    %
    
    
    6.03
    %Investment Securities: (3)Available for sale
    
    
    111,784
    
    
    
    151,729
    
    
    
    2,456
    
    
    
    5,994
    
    
    
    2.20
    %
    
    
    3.95
    %Held to maturity
    
    
    1,362
    
    
    
    2,156
    
    
    
    61
    
    
    
    87
    
    
    
    4.48
    %
    
    
    4.04
    %Equity securities
    
    
    3,837
    
    
    
    3,895
    
    
    
    189
    
    
    
    191
    
    
    
    4.93
    %
    
    
    4.90
    %Total securities
    
    
    116,983
    
    
    
    157,780
    
    
    
    2,706
    
    
    
    6,272
    
    
    
    2.31
    %
    
    
    3.98
    %Federal funds sold and other
    
    
    29,310
    
    
    
    13,295
    
    
    
    76
    
    
    
    25
    
    
    
    0.26
    %
    
    
    0.19
    %Total interest-earning
assets
    
    
    543,887
    
    
    
    586,597
    
    
    
    23,456
    
    
    
    31,369
    
    
    
    4.31
    %
    
    
    5.35
    %Nonearning assets
    
    
    74,544
    
    
    
    72,816Total Assets
    
    $
    618,431
    
    
    $
    659,413Interest-bearing liabilities:Interest bearing deposits:Interest bearing
demand deposits
    
    
    119,547
    
    
    
    150,384
    
    
    
    1,309
    
    
    
    1,856
    
    
    
    1.09
    %
    
    
    1.23
    %Savings deposits
    
    
    22,790
    
    
    
    17,340
    
    
    
    245
    
    
    
    241
    
    
    
    1.08
    %
    
    
    1.39
    %Time deposits
    
    
    302,494
    
    
    
    304,715
    
    
    
    6,283
    
    
    
    8,151
    
    
    
    2.08
    %
    
    
    2.67
    %Total interest bearing deposits
    
    
    444,831
    
    
    
    472,439
    
    
    
    7,837
    
    
    
    10,248
    
    
    
    1.76
    %
    
    
    2.17
    %Securities sold under agreements
to repurchase
    
    
    1,535
    
    
    
    4,284
    
    
    
    24
    
    
    
    91
    
    
    
    1.56
    %
    
    
    2.12
    %Federal Home Loan Bank advances
and other borrowings
    
    
    61,657
    
    
    
    68,442
    
    
    
    2,497
    
    
    
    2,627
    
    
    
    4.05
    %
    
    
    3.84
    %Subordinated debt
    
    
    13,403
    
    
    
    13,403
    
    
    
    344
    
    
    
    392
    
    
    
    2.57
    %
    
    
    2.92
    %Total interest-bearing liabilities
    
    
    521,426
    
    
    
    558,568
    
    
    
    10,702
    
    
    
    13,358
    
    
    
    2.05
    %
    
    
    2.39
    %Noninterest-bearing deposits
    
    
    46,237
    
    
    
    45,761
    
    
    
    
    
    
    
    Total deposits and interest-bearings liabilities
    
    
    567,663
    
    
    
    604,329
    
    
    
    10,702
    
    
    
    13,358
    
    
    
    1.89
    %
    
    
    2.21
    %Other liabilities
    
    
    2,890
    
    
    
    3,143Shareholders equity
    
    
    47,878
    
    
    
    51,941$
    618,431
    
    
    $
    659,413Net interest income
    
    
    
    
    
    
    
    
    
    $
    12,754
    
    
    $
    18,011Net interest spread (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.26
    %
    
    
    2.96
    %Net interest margin (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.34
    %
    
    
    3.07
    %
 
 (1)
    
    Interest income from loans includes total fee income of approximately $889,000 and
$1,134,000 for the
years ended December 31, 2010 and 2009, respectively.(2)
    
    For the purpose of these computations, non-accrual loans are included in average loans.(3)
    
    Tax-exempt income from investment securities is not presented on a tax-equivalent basis.(4)
    
    Yields realized on interest-earning assets less the rates paid on interest-bearing
liabilities.(5)
    
    Net interest margin is the result of net interest income divided by average interest-earning assets for the period.  43




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Rate and Volume Analysis
   45




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ANALYSIS OF CHANGES IN NET INTEREST INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009  (dollars in thousands)
 2010 Compared to 2009Increase (decrease)due to change inRate
    
    
    Volume
    
    
    TotalIncome from interest-earning assets:Interest and fees on loans
    
    $
    (3,313
    )
    
    $
    (1,085
    )
    
    $
    (4,398
    )Interest on securities
    
    
    (1,948
    )
    
    
    (1,618
    )
    
    
    (3,566
    )Interest on Federal funds sold and other
    
    
    21
    
    
    
    30
    
    
    
    51Total interest income
    
    
    (5,240
    )
    
    
    (2,673
    )
    
    
    (7,913
    )Expense from interest-bearing liabilities:Interest on interest-bearing deposits
    
    
    (227
    )
    
    
    (316
    )
    
    
    (543
    )Interest on time deposits
    
    
    (1,808
    )
    
    
    (60
    )
    
    
    (1,868
    )Interest on other borrowings
    
    
    100
    
    
    
    (345
    )
    
    
    (245
    )Total interest expense
    
    
    (1,935
    )
    
    
    (721
    )
    
    
    (2,656
    )Net interest income
    
    $
    (3,305
    )
    
    $
    (1,952
    )
    
    $
    (5,257
    )
 Provision for Loan Losses
    46




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Noninterest Income
  Years Ended December 31,
    
    
    Dollar Change
    
    
    Percent Change2010
    
    
    2009
    
    
    2010 to 2009
    
    
    2010 to 2009Service charges on deposit
accounts
    
    $
    1,642
    
    
    $
    2,327
    
    
    $
    (685
    )
    
    
    -29.44
    %Other fees and commissions
    
    
    1,473
    
    
    
    1,262
    
    
    
    211
    
    
    
    16.72
    %Gain on sale of mortgage loans
    
    
    191
    
    
    
    147
    
    
    
    44
    
    
    
    29.93
    %Gain on sale of securities, net
    
    
    1,511
    
    
    
    2,558
    
    
    
    (1,047
    )
    
    
    -40.93
    %Loss on impairment of securities
    
    
    
    
    
    
    (347
    )
    
    
    347
    
    
    
    -100.00
    %Gain (loss) on other real
estate, net
    
    
    34
    
    
    
    (1,479
    )
    
    
    1,513
    
    
    
    -102.30
    %Other noninterest income
    
    
    899
    
    
    
    395
    
    
    
    504
    
    
    
    127.59
    %Total noninterest income
    
    $
    5,750
    
    
    $
    4,863
    
    
    $
    887
    
    
    
    18.24
    %
   47




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##### Table of Contents



Noninterest Expenses
  Years Ended December 31,
    
    
    Dollar Change
    
    
    Percent Change2010
    
    
    2009
    
    
    2010 to 2009
    
    
    2010 to 2009Salaries and employee benefits
    
    $
    8,322
    
    
    $
    9,670
    
    
    $
    (1,348
    )
    
    
    -13.94
    %Occupancy expenses
    
    
    1,759
    
    
    
    1,699
    
    
    
    60
    
    
    
    3.53
    %FDIC assessment expense
    
    
    1,161
    
    
    
    1,537
    
    
    
    (376
    )
    
    
    -24.46
    %Other operating expenses
    
    
    6,248
    
    
    
    6,311
    
    
    
    (63
    )
    
    
    -1.00
    %Total noninterest expense
    
    $
    17,490
    
    
    $
    19,217
    
    
    $
    (1,727
    )
    
    
    -8.99
    %
   48




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##### Table of Contents



Income Taxes
  Provision for Income Taxes and Effective Tax Rates  (dollars in thousands)
 Provision
    
    
    EffectiveExpense/(Benefit)
    
    
    Tax Rates2010
    
    $
    3,738
    
    
    
    -55.68
    %2009
    
    $
    (3,788
    )
    
    
    47.26
    %
    49




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##### Table of Contents



Discussion of Financial Condition
 General Discussion of Our Financial Condition
  2010
    
    
    2009
    
    
    $ change
    
    
    % changeCash and equivalents
    
    $
    32,576
    
    
    $
    14,105
    
    
    $
    18,471
    
    
    
    130.95
    %Loans
    
    
    374,355
    
    
    
    407,704
    
    
    
    (33,349
    )
    
    
    -8.18
    %Allowance for loan losses
    
    
    10,942
    
    
    
    11,353
    
    
    
    (411
    )
    
    
    -3.62
    %Investment securities
    
    
    87,635
    
    
    
    146,534
    
    
    
    (58,899
    )
    
    
    -40.19
    %Premises and equipment
    
    
    32,601
    
    
    
    33,709
    
    
    
    (1,108
    )
    
    
    -3.29
    %Other real estate owned
    
    
    13,141
    
    
    
    14,575
    
    
    
    (1,434
    )
    
    
    -9.84
    %Total assets
    
    
    557,207
    
    
    
    639,739
    
    
    
    (82,532
    )
    
    
    -12.90
    %Noninterest-bearing demand deposits
    
    
    47,639
    
    
    
    47,601
    
    
    
    38
    
    
    
    0.08
    %Interest-bearing demand and savings deposits
    
    
    130,779
    
    
    
    173,769
    
    
    
    (42,990
    )
    
    
    -24.74
    %Time deposits
    
    
    271,173
    
    
    
    289,244
    
    
    
    (18,071
    )
    
    
    -6.25
    %Total deposits
    
    
    449,591
    
    
    
    510,614
    
    
    
    (61,023
    )
    
    
    -11.95
    %Federal Home Loan Bank advances
    
    
    55,200
    
    
    
    62,900
    
    
    
    (7,700
    )
    
    
    -12.24
    %Subordinated debentures
    
    
    13,403
    
    
    
    13,403
    
    
    
    
    
    
    
    0.00
    %Total liabilities
    
    
    521,532
    
    
    
    592,370
    
    
    
    (70,838
    )
    
    
    -11.96
    %Accumulated other comprehensive income
(loss)
    
    
    (1,065
    )
    
    
    283
    
    
    
    (1,348
    )
    
    
    -476.33
    %Total shareholders equity
    
    $
    35,674
    
    
    $
    47,369
    
    
    $
    (11,695
    )
    
    
    -24.69
    %
 Loans
   50




---



##### Table of Contents



Loan Portfolio
 At December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(in thousands)Commercial, financial, agricultural
    
    $
    24,944
    
    
    $
    30,387
    
    
    $
    37,632
    
    
    $
    35,929
    
    
    $
    26,062Real estate  construction,
development
    
    
    83,543
    
    
    
    99,771
    
    
    
    142,370
    
    
    
    150,844
    
    
    
    137,989Real estate  mortgage
    
    
    260,738
    
    
    
    270,622
    
    
    
    231,999
    
    
    
    201,011
    
    
    
    173,085Consumer and other
    
    
    5,130
    
    
    
    6,924
    
    
    
    8,428
    
    
    
    9,890
    
    
    
    7,572Less allowance for loan losses
    
    
    10,942
    
    
    
    11,353
    
    
    
    5,292
    
    
    
    3,974
    
    
    
    3,524Loans, net
    
    $
    363,413
    
    
    $
    396,351
    
    
    $
    415,137
    
    
    $
    393,700
    
    
    $
    341,184
  Maturities and Sensitivities of Loan Portfolio to Changes in Interest Rates
 One year
    
    
    Over one year
    
    
    Over three years
    
    
    Over fiveor less
    
    
    through three years
    
    
    through five years
    
    
    years(in thousands)Commercial, financial, agricultural
    
    $
    10,825
    
    
    $
    8,117
    
    
    $
    3,170
    
    
    $
    2,832Real estate  construction,
development
    
    
    57,116
    
    
    
    22,620
    
    
    
    2,170
    
    
    
    1,637Real estate  mortgage
    
    
    139,028
    
    
    
    77,980
    
    
    
    21,524
    
    
    
    22,206Consumer and other
    
    
    3,102
    
    
    
    1,490
    
    
    
    422
    
    
    
    116Total
    
    $
    210,071
    
    
    $
    110,207
    
    
    $
    27,286
    
    
    $
    26,791
   51




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##### Table of Contents



Past Due Loans and Non-Performing Assets
  December 31,2010
    
    
    2009Balance
    
    
    % of total loans
    
    
    Balance
    
    
    % of total loans($ in thousands)Construction, land
development
and other land loans
    
    $
    265
    
    
    
    0.07
    %
    
    $
    656
    
    
    
    0.16
    %Commercial real estate
    
    
    541
    
    
    
    0.14
    %
    
    
    126
    
    
    
    0.03
    %Consumer real estate
    
    
    1,130
    
    
    
    0.30
    %
    
    
    1,125
    
    
    
    0.28
    %Commercial loans
    
    
    
    
    
    
    0.00
    %
    
    
    138
    
    
    
    0.03
    %Consumer loans
    
    
    68
    
    
    
    0.02
    %
    
    
    81
    
    
    
    0.02
    %Total
    
    $
    2,004
    
    
    
    0.54
    %
    
    $
    2,126
    
    
    
    0.52
    %
   52




---



##### Table of Contents



Past due 90 days
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other real
    
    
    Totalor more and
    
    
    % of total
    
    
    Nonaccrual
    
    
    % of total
    
    
    estate
    
    
    non-performingstill accruing
    
    
    loans
    
    
    loans
    
    
    loans
    
    
    owned
    
    
    assets($ in thousands)As of December 31, 2010Construction, land
development
and other land loans
    
    $
    
    
    
    
    0.00
    %
    
    $
    27,929
    
    
    
    7.46
    %
    
    $
    2,595
    
    
    $
    30,524Commercial real estate
    
    
    413
    
    
    
    0.11
    %
    
    
    6,362
    
    
    
    1.70
    %
    
    
    2,107
    
    
    
    8,882Consumer real estate
    
    
    
    
    
    
    0.00
    %
    
    
    18,647
    
    
    
    4.98
    %
    
    
    8,439
    
    
    
    27,086Commercial loans
    
    
    
    
    
    
    0.00
    %
    
    
    67
    
    
    
    0.02
    %
    
    
    
    
    
    
    67Consumer loans
    
    
    19
    
    
    
    0.01
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    19Total
    
    $
    432
    
    
    
    0.12
    %
    
    $
    53,005
    
    
    
    14.16
    %
    
    $
    13,141
    
    
    $
    66,578Total non-performing
loans to total loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.27
    %Total non-performing
assets to total
loans plus other
real estate owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17.18
    %As of December 31, 2009Construction, land
development
and other land loans
    
    $
    43
    
    
    
    0.01
    %
    
    $
    21,596
    
    
    
    5.30
    %
    
    $
    5,834
    
    
    $
    27,473Commercial real estate
    
    
    
    
    
    
    0.00
    %
    
    
    11,003
    
    
    
    2.70
    %
    
    
    1,093
    
    
    
    12,096Consumer real estate
    
    
    
    
    
    
    0.00
    %
    
    
    7,864
    
    
    
    1.93
    %
    
    
    7,648
    
    
    
    15,512Commercial loans
    
    
    
    
    
    
    0.00
    %
    
    
    75
    
    
    
    0.02
    %
    
    
    
    
    
    
    75Consumer loans
    
    
    25
    
    
    
    0.01
    %
    
    
    10
    
    
    
    0.00
    %
    
    
    
    
    
    
    35Total
    
    $
    68
    
    
    
    0.02
    %
    
    $
    40,548
    
    
    
    9.95
    %
    
    $
    14,575
    
    
    $
    55,191Total non-performing
loans to total loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.96
    %Total non-performing
assets to total loans
plus other
real estate owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.07
    %
    53




---



##### Table of Contents



2010
    
    
    2009(in thousands)Interest income that would have been recorded on
nonaccrual loans under original terms
    
    $
    3,164
    
    
    $
    1,359Interest income that was recorded on nonaccrual
loans
    
    
    603
    
    
    
    45
       54




---



##### Table of Contents



Allowance for Loan Losses
     55




---



##### Table of Contents



56




---



##### Table of Contents



December 31, 2010
    
    
    December 31, 2009Impaired
    
    
    % of total
    
    
    Impaired
    
    
    % of totalLoans
    
    
    loans
    
    
    Loans
    
    
    loans($ in thousands)Construction, land development
and other land loans
    
    $
    41,517
    
    
    
    11.09
    %
    
    $
    27,213
    
    
    
    6.67
    %Commercial real estate
    
    
    21,529
    
    
    
    5.75
    %
    
    
    13,224
    
    
    
    3.24
    %Consumer real estate
    
    
    29,182
    
    
    
    7.80
    %
    
    
    22,616
    
    
    
    5.55
    %Other loans
    
    
    128
    
    
    
    0.03
    %
    
    
    94
    
    
    
    0.02
    %Total
    
    $
    92,356
    
    
    
    24.67
    %
    
    $
    63,147
    
    
    
    15.49
    %
    57




---



##### Table of Contents



58




---



##### Table of Contents



At December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(dollars in thousands)Average balance of loans outstanding
    
    $
    397,594
    
    
    $
    415,522
    
    
    $
    417,124
    
    
    $
    373,237
    
    
    $
    292,950Balance of allowance for loan losses at beginning of year
    
    
    11,353
    
    
    
    5,292
    
    
    
    3,974
    
    
    
    3,524
    
    
    
    2,634Charge-offs:Commercial, financial, agricultural
    
    
    225
    
    
    
    328
    
    
    
    198
    
    
    
    43
    
    
    
    Real estate  construction, development
    
    
    5,439
    
    
    
    3,054
    
    
    
    686
    
    
    
    158
    
    
    
    1Real estate  mortgage
    
    
    2,652
    
    
    
    2,220
    
    
    
    41
    
    
    
    250
    
    
    
    25Consumer and other
    
    
    278
    
    
    
    289
    
    
    
    98
    
    
    
    110
    
    
    
    23Recoveries:Commercial, financial, agricultural
    
    
    13
    
    
    
    1
    
    
    
    43
    
    
    
    
    
    
    
    Real estate  construction, development
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Real estate  mortgage
    
    
    4
    
    
    
    251
    
    
    
    11
    
    
    
    15
    
    
    
    18Consumer and other
    
    
    49
    
    
    
    27
    
    
    
    12
    
    
    
    14
    
    
    
    5Net charge-offs
    
    
    8,138
    
    
    
    5,612
    
    
    
    957
    
    
    
    532
    
    
    
    25Additions to allowance charges to operations
    
    
    7,727
    
    
    
    11,673
    
    
    
    2,275
    
    
    
    982
    
    
    
    915Balance of allowance for loan losses at end of year
    
    
    10,942
    
    
    
    11,353
    
    
    
    5,292
    
    
    
    3,974
    
    
    
    3,524Ratio of net loan charge-offs during the year to average
loans outstanding during the year
    
    
    2.05
    %
    
    
    1.35
    %
    
    
    0.23
    %
    
    
    0.14
    %
    
    
    0.01
    %
  At December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    LoanCategory as
    
    
    
    
    
    
    Category as
    
    
    
    
    
    
    Category as
    
    
    
    
    
    
    Category as
    
    
    
    
    
    
    Category as% of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans(dollars in thousands)Commercial
    
    $
    396
    
    
    
    6.65
    %
    
    $
    557
    
    
    
    7.45
    %
    
    $
    1,289
    
    
    
    8.95
    %
    
    $
    968
    
    
    
    9.03
    %
    
    $
    418
    
    
    
    7.56
    %Real estate  construction,
development
    
    
    3,614
    
    
    
    22.31
    %
    
    
    5,844
    
    
    
    24.47
    %
    
    
    2,131
    
    
    
    33.86
    %
    
    
    1,600
    
    
    
    37.93
    %
    
    
    1,331
    
    
    
    40.03
    %Real estate  mortgage
    
    
    6,713
    
    
    
    69.67
    %
    
    
    4,798
    
    
    
    66.38
    %
    
    
    1,599
    
    
    
    55.18
    %
    
    
    1,201
    
    
    
    50.55
    %
    
    
    1,669
    
    
    
    50.21
    %Consumer, other
    
    
    219
    
    
    
    1.37
    %
    
    
    154
    
    
    
    1.70
    %
    
    
    273
    
    
    
    2.01
    %
    
    
    205
    
    
    
    2.49
    %
    
    
    106
    
    
    
    2.20
    %Total
    
    $
    10,942
    
    
    
    100.00
    %
    
    $
    11,353
    
    
    
    100.00
    %
    
    $
    5,292
    
    
    
    100.00
    %
    
    $
    3,974
    
    
    
    100.00
    %
    
    $
    3,524
    
    
    
    100.00
    %
 Securities
   59




---



##### Table of Contents



60




---



##### Table of Contents



At December 31,2010
    
    
    2009
    
    
    2008(in thousands)Securities available for sale:U.S. Treasury and government agencies
and corporations
    
    $
    250
    
    
    $
    10,149
    
    
    $
    5,751Corporate securities
    
    
    
    
    
    
    
    
    
    
    175Mortgage-backed securities  residential
    
    
    81,145
    
    
    
    114,057
    
    
    
    98,045Obligations of states and political subdivisions
    
    
    4,922
    
    
    
    20,124
    
    
    
    20,607Total
    
    
    86,317
    
    
    
    144,330
    
    
    
    124,578Securities held to maturity:Obligations of states and political subdivisions
    
    
    1,318
    
    
    
    2,204
    
    
    
    2,117
  MaturityWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage Tax
    
    
    After 1
    
    
    Average Tax
    
    
    After 5
    
    
    Average Tax
    
    
    
    
    
    
    Average Tax
    
    
    
    
    
    
    Average Tax1 year
    
    
    Equivalent
    
    
    Year - 5
    
    
    Equivalent
    
    
    Years - 10
    
    
    Equivalent
    
    
    Over 10
    
    
    Equivalent
    
    
    
    
    
    
    Equivalentor less
    
    
    Yield
    
    
    Years
    
    
    Yield
    
    
    Years
    
    
    Yield
    
    
    Years
    
    
    Yield
    
    
    Total
    
    
    Yield(dollars in thousands)Securities available for sale:U.S. Treasury and
government agencies
    
    $
    250
    
    
    
    0.14
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    250
    
    
    
    0.14
    %Mortgage-backed securities
 residential
    
    
    
    
    
    
    
    
    
    
    74,096
    
    
    
    3.74
    %
    
    
    5,785
    
    
    
    4.09
    %
    
    
    1,264
    
    
    
    3.77
    %
    
    
    81,145
    
    
    
    3.76
    %Obligations of states and
political subdivisions
    
    
    
    
    
    
    
    
    
    
    264
    
    
    
    2.33
    %
    
    
    1,189
    
    
    
    5.68
    %
    
    
    3,469
    
    
    
    4.47
    %
    
    
    4,922
    
    
    
    4.65
    %Total available for sale
    
    
    250
    
    
    
    0.14
    %
    
    
    74,360
    
    
    
    3.73
    %
    
    
    6,974
    
    
    
    4.36
    %
    
    
    4,733
    
    
    
    4.29
    %
    
    
    86,317
    
    
    
    3.80
    %Securities held to maturity:Obligations of states and
political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    722
    
    
    
    4.65
    %
    
    
    596
    
    
    
    4.72
    %
    
    
    1,318
    
    
    
    4.68
    %Total held to maturity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    722
    
    
    
    4.65
    %
    
    
    596
    
    
    
    4.72
    %
    
    
    1,318
    
    
    
    4.68
    %Total securities
    
    
    250
    
    
    
    0.14
    %
    
    
    74,360
    
    
    
    3.73
    %
    
    
    7,696
    
    
    
    4.39
    %
    
    
    5,329
    
    
    
    4.33
    %
    
    
    87,635
    
    
    
    3.82
    %
   61




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##### Table of Contents



Deposits
  2010
    
    
    2009
    
    
    $ change
    
    
    % changeNoninterest-bearing demand deposits
    
    $
    47,638
    
    
    $
    47,601
    
    
    $
    37
    
    
    
    0.08
    %Total noninterest-bearing deposits
    
    
    47,638
    
    
    
    47,601
    
    
    
    37
    
    
    
    0.08
    %NOW accounts
    
    
    57,345
    
    
    
    112,440
    
    
    
    (55,095
    )
    
    
    -49.00
    %Money market accounts
    
    
    49,701
    
    
    
    40,809
    
    
    
    8,892
    
    
    
    21.79
    %Savings
    
    
    23,734
    
    
    
    20,520
    
    
    
    3,214
    
    
    
    15.66
    %Brokered deposits
    
    
    27,019
    
    
    
    69,871
    
    
    
    (42,852
    )
    
    
    -61.33
    %Time deposits
    
    
    244,154
    
    
    
    219,373
    
    
    
    24,781
    
    
    
    11.30
    %Total interest-bearing deposits
    
    
    401,953
    
    
    
    463,013
    
    
    
    (61,060
    )
    
    
    -13.19
    %Total deposits
    
    $
    449,591
    
    
    $
    510,614
    
    
    $
    (61,023
    )
    
    
    -11.95
    %
 Investment Securities
       62




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##### Table of Contents



2010
    
    
    2009
    
    
    2008Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(dollars in thousands)Noninterest-bearing demand deposits
    
    $
    46,237
    
    
    
    0
    %
    
    $
    45,761
    
    
    
    0
    %
    
    $
    48,331
    
    
    
    0
    %Interest-bearing demand deposits
    
    
    119,547
    
    
    
    1.09
    %
    
    
    150,384
    
    
    
    1.23
    %
    
    
    142,020
    
    
    
    2.16
    %Savings deposits
    
    
    22,790
    
    
    
    1.08
    %
    
    
    17,340
    
    
    
    1.39
    %
    
    
    13,815
    
    
    
    1.95
    %Time deposits
    
    
    302,494
    
    
    
    2.08
    %
    
    
    304,715
    
    
    
    2.67
    %
    
    
    224,055
    
    
    
    4.28
    %Total
    
    $
    491,068
    
    
    
    
    
    
    $
    518,200
    
    
    
    
    
    
    $
    428,221
  (dollars in thousands)Three months or less
    
    $
    73,289Over three months through six months
    
    
    30,097Over six months through 12 months
    
    
    80,470Over 12 months
    
    
    87,317Total
    
    $
    271,173
    63




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##### Table of Contents



Shareholders Equity
  Interest Rate Sensitivity Management
      64




---



##### Table of Contents



65




---



##### Table of Contents



Analysis of Interest Sensitivity
As of December 31, 2010  (dollars in thousands)
 0 - 3
    
    
    3 - 12
    
    
    1 - 3
    
    
    Over threemonths
    
    
    months
    
    
    years
    
    
    years
    
    
    TotalFederal funds sold
    
    $
    2,536
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,536Securities
    
    
    3,031
    
    
    
    9,426
    
    
    
    24,000
    
    
    
    51,178
    
    
    
    87,635Loans (1)
    
    
    181,404
    
    
    
    78,123
    
    
    
    82,277
    
    
    
    32,551
    
    
    
    374,355Total interest-earning assets
    
    
    186,971
    
    
    
    87,549
    
    
    
    106,277
    
    
    
    83,729
    
    
    
    464,526Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    107,046
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107,046Savings
    
    
    23,734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,734Time deposits
    
    
    72,495
    
    
    
    110,187
    
    
    
    77,820
    
    
    
    10,671
    
    
    
    271,173Other borrowings
    
    
    
    
    
    
    
    
    
    
    5,200
    
    
    
    50,000
    
    
    
    55,200Total interest-bearing liabilities
    
    
    203,275
    
    
    
    110,187
    
    
    
    83,020
    
    
    
    60,671
    
    
    
    457,153Interest rate sensitivity gap
    
    $
    (16,304
    )
    
    $
    (22,638
    )
    
    $
    23,257
    
    
    $
    23,058
    
    
    $
    7,373Cumulative interest rate sensitivity gap
    
    $
    (16,304
    )
    
    $
    (38,942
    )
    
    $
    (15,685
    )
    
    $
    7,373Interest rate sensitivity gap ratio
    
    
    -8.72
    %
    
    
    -25.86
    %
    
    
    21.88
    %
    
    
    27.54
    %Cumulative interest rate sensitivity gap ratio
    
    
    -8.72
    %
    
    
    -14.19
    %
    
    
    -4.12
    %
    
    
    1.59
    %
 
 (1)
    
    Includes nonaccrual loans   66




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##### Table of Contents



Return on Assets and Equity
  For the Years EndedAt December 31,2010
    
    
    2009
    
    
    2008Return on average assets
    
    
    -1.69
    %
    
    
    -0.64
    %
    
    
    0.56
    %Return on average equity
    
    
    -21.83
    %
    
    
    -8.14
    %
    
    
    6.48
    %Average equity as a percentage of average assets
    
    
    7.74
    %
    
    
    7.88
    %
    
    
    8.68
    %Cash dividend payout ratio
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    30.65
    %
 Capital Adequacy and Liquidity
   Regulatory Capital Requirements
     67




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##### Table of Contents



December 31,2010
    
    
    2009Tier 1 Leverage
    
    
    8.41
    %
    
    
    9.14
    %Adequately capitalized regulatory minimum
    
    
    4.00
    %
    
    
    4.00
    %Well-capitalized regulatory minimum
    
    
    5.00
    %
    
    
    5.00
    %Required by IMCR
    
    
    9.00
    %
    
    
    N/ATier 1 Risk-Based Capital
    
    
    11.97
    %
    
    
    12.75
    %Adequately capitalized regulatory minimum
    
    
    4.00
    %
    
    
    4.00
    %Well-capitalized regulatory minimum
    
    
    6.00
    %
    
    
    6.00
    %Total Risk-Based Capital
    
    
    13.23
    %
    
    
    14.02
    %Adequately capitalized regulatory minimum
    
    
    8.00
    %
    
    
    8.00
    %Well-capitalized regulatory minimum
    
    
    10.00
    %
    
    
    10.00
    %Required by IMCR
    
    
    13.00
    %
    
    
    N/A
  December 31,2010
    
    
    2009Tier 1 Leverage
    
    
    8.34
    %
    
    
    9.23
    %Regulatory minimum
    
    
    4.00
    %
    
    
    4.00
    %Tier 1 Risk-Based Capital
    
    
    11.87
    %
    
    
    12.89
    %Regulatory minimum
    
    
    4.00
    %
    
    
    4.00
    %Total Risk-Based Capital
    
    
    13.27
    %
    
    
    14.16
    %Regulatory minimum
    
    
    8.00
    %
    
    
    8.00
    %
  68




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##### Table of Contents



Off-Balance Sheet Arrangements
  Commitments and Lines of Credit
   69




---



##### Table of Contents



2010
    
    
    2009(dollars in thousands)Commitments to extend credit
    
    $
    41,155
    
    
    $
    50,702Standby letters of credit
    
    
    5,288
    
    
    
    5,801Totals
    
    $
    46,443
    
    
    $
    56,503
  Effects of Inflation
   Significant Accounting Changes
  
 ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
   70




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##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Managements Annual Report on Internal Control over Financial Reporting
    71




---



##### Table of Contents



Changes in Internal Control over Financial Reporting
   1)
    
    During the first quarter of 2011, the OCC, during their regular safety and soundness
exam, determined several loans were not properly identified by the Bank as collateral
dependent as of December 31, 2010. Collateral dependent loans require a charge off of the
loan balance if the recorded investment in the loan exceeds the underlying collateral value
net of cost to sell. To make the determination the proper recorded investment has been
recorded, the current appraised value of the collateral must be obtained. The Special
Assets Department, formed during 2009, is in charge of complying with these requirements.
During the first quarter of 2011, procedures were put in place in the Special Assets
Department to comply with these requirements and the results of their efforts have been
incorporated into the financial statements as of December 31, 2010.
  72




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##### Table of Contents



2)
    
    As noted in item 1, collateral dependent loans require the Bank to obtain a current
appraisal or collateral valuation performed internally to allow for the determination as to
whether there is sufficient collateral securing the loan. In addition to the requirement of
obtaining the appraisal, the appraisal must be reviewed by an independent third-party
appraiser charged with determining the appraisal has been properly performed. After the
review, the Bank determines if the appraisal is acceptable, then provides the documentation
to the Accounting Department to incorporate the results into the calculation of the
allowance for loan losses. Failure to comply with any of these steps could result in the
overstatement of both assets and income. The Special Assets Department, as noted in item 1,
is in charge of complying with these requirements and during the first quarter of 2011,
procedures were put in place to comply with these requirements and the results of their
efforts have been incorporated into the financial statements as of December 31, 2010.
 3)
    
    During the first quarter of 2011, Management ensured proper controls are in place when
evidence of impairment of a loan exists or prior to the annual appraisal date, the Special
Assets Department will order appraisals or collateral valuations in a timely manner to
allow for proper review and implementation of the results into the allowance for loan loss
calculation. Proper controls have also been developed and incorporated into the process to
assure a potential impairment is recorded when appraisal or valuation and review process is
not complete as of a reporting date.
 4)
    
    The Bank has revised its policy and procedures to require independent third-party
appraisals or collateral valuations performed internally for all loans considered to be
impaired, classified or worse. The Special Assets Department, as noted in item 1, is in
charge of complying with these requirements and during the first quarter of 2011,
procedures were put in place to comply with these requirements and the results of their
efforts have been incorporated into the financial statements as of December 31, 2010.
  
 ITEM 9B.
    
    OTHER INFORMATION
  
 PART III
 
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11.
    
    EXECUTIVE COMPENSATION
   73




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##### Table of Contents



ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
   
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 PART IV
 
 ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 (a)(1)
    
    Financial statements. See Item 8.
 (a)(2)
    
    Financial statement schedules. Inapplicable.
 (a)(3)
    
    The following exhibits are filed as a part of or incorporated by reference in this
report:
 Exhibit No.
    
    Description of Exhibit2.1
    
    
    Plan of Reorganization dated March 28, 2003, by and between
the Company and Mountain National Bank (included as Exhibit
2.1 to the Report on Form 8-K12G3 of the Company, dated July
12, 2003 (File No. 000-49912), previously filed with the
Commission and incorporated herein by reference).2.2
    
    
    Amendment to Plan of Reorganization dated July 1, 2003
(included as Exhibit 2.2 to the Report on Form 8-K12G3 of the
Company, dated July 12, 2003 (File No. 000-49912), previously
filed with the Commission and incorporated herein by
reference).3.1
    
    
    Charter of Incorporation of the Company, as amended (Restated
for SEC filing purposes only) (included as Exhibit 3.1 to the
Companys Registration Statement on Form S-1 (File No.
333-168281), previously filed with the Commission and
incorporated by reference herein).
  74




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##### Table of Contents



Exhibit No.

    
    Description of Exhibit3.2
    
    
    Amended and Restated Bylaws of the Company, as amended
(included as Exhibit 3.1 to the Report on Form 8-K of the
Company, dated March 31, 2010 (File No. 000-49912), previously
filed with the Commission and incorporated herein by
reference).10.1
    
    
    Stock Option Plan of the Company, as amended (included as
Exhibit 10.1 to the Report on Form 8-K of the Company, dated
May 19, 2006 (File No. 000-49912), previously filed with the
Commission and incorporated herein by reference)*10.2
    
    
    Stock Option Agreement of Dwight B. Grizzell (assumed by
Company) (included as Exhibit 10.3 to the Companys Form
10-KSB for the year ended December 31, 2002 and incorporated
herein by reference)*10.3
    
    
    Summary Description of Director and Named Executive Officer
Compensation Arrangements*10.4
    
    
    Form of Warrant Agreement (included as Exhibit 10.5 to the
Companys Form SB-2/A filed with the Commission on August 23,
2005)10.5
    
    
    Employment Agreement dated as of May 15, 2009 by and among
Mountain National Bank, Mountain National Bancshares, Inc. and
Grace McKinzie (included as Exhibit 10.1 to the Report on Form
8-K of the Company, dated March 31, 2010 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)*10.6
    
    
    Employment Agreement dated as of May 28, 2009 by and among
Mountain National Bank, Mountain National Bancshares, Inc. and
Michael Brown (included as Exhibit 10.2 to the Report on Form
8-K of the Company, dated March 31, 2010 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)*10.7
    
    
    Employment Agreement dated as of May 18, 2009 by and among
Mountain National Bank, Mountain National Bancshares, Inc. and
Richard Hubbs (included as Exhibit 10.3 to the Report on Form
8-K of the Company, dated March 31, 2010 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)*10.8
    
    
    Amended and Restated Salary Continuation Agreement, dated
January 19, 2007, by and between Mountain National Bank and
Dwight Grizzell. (included as Exhibit 10.8 to the Companys
Form 10-K for the year ended December 31, 2007 and
incorporated herein by reference)*10.9
    
    
    Amendment, dated November 19, 2007, to Amended and Restated
Salary Continuation Agreement, by and between Mountain
National Bank and Dwight Grizzell. (included as Exhibit 10.9
to the Companys Form 10-K for the year ended December 31,
2007 and incorporated herein by reference)*
  75




---



##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.10
    
    
    Amended and Restated Salary Continuation Agreement, dated
January 19, 2007, by and between Mountain National Bank and
Michael Brown. (included as Exhibit 10.10 to the Companys
Form 10-K for the year ended December 31, 2007 and
incorporated herein by reference)*10.11
    
    
    Amendment, dated November 19, 2007, to Amended and Restated
Salary Continuation Agreement, by and between Mountain
National Bank and Michael Brown. (included as Exhibit 10.11 to
the Companys Form 10-K for the year ended December 31, 2007
and incorporated herein by reference)*10.12
    
    
    Amended and Restated Salary Continuation Agreement, dated
January 19, 2007, by and between Mountain National Bank and
Grace McKinzie. (included as Exhibit 10.12 to the Companys
Form 10-K for the year ended December 31, 2007 and
incorporated herein by reference)*10.13
    
    
    Amendment, dated November 19, 2007, to Amended and Restated
Salary Continuation Agreement, by and between Mountain
National Bank and Grace McKinzie. (included as Exhibit 10.13
to the Companys Form 10-K for the year ended December 31,
2007 and incorporated herein by reference)*10.14
    
    
    Agreement, dated June 2, 2009, by and between Mountain
National Bank and the Office of the Comptroller of the
Currency. (included as Exhibit 10.1 to the Report on Form 8-K
of the Company, dated June 5, 2009, (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)21
    
    
    Subsidiaries of the Company23
    
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    
    Certificate of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    
    Certificate of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    
    Certificate of CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    
    Certificate of CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 *
    
    Denotes management contract or compensatory plan or arrangement.  76




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77




---



##### Table of Contents



SIGNATURES
  MOUNTAIN NATIONAL BANCSHARES, INC.
(Registrant)By:
    /s/ Dwight B. GrizzellDwight B. GrizzellPresident and Chief Executive Officer Date: April 13, 2011  /s/ Dwight B. Grizzell

Dwight B. Grizzell, President,
    
    Date: April 13, 2011Chief Executive Officer and Director/s/ Richard A. Hubbs

Richard A. Hubbs, Senior Vice President and
    
    Date: April 13, 2011Chief Financial Officer (Principal Financialand Accounting Officer)/s/ Gary A. Helton

Gary A. Helton, Director
    
    Date: April 13, 2011/s/ Charlie R. Johnson

Charlie R. Johnson, Director
    
    Date: April 13, 2011/s/ Sam L. Large

Sam L. Large, Director
    
    Date: April 13, 2011/s/ Jeffrey J. Monson

Jeffrey J. Monson, Director
    
    Date: April 13, 2011/s/ Linda N. Ogle

Linda N. Ogle, Director
    
    Date: April 13, 2011/s/ Michael C. Ownby

Michael C. Ownby, Director
    
    Date: April 13, 2011/s/ John M. Parker

John M. Parker, Director
    
    Date: April 13, 2011/s/ Ruth Reams

Ruth Reams, Director
    
    Date: April 13, 2011
  78




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##### Table of Contents



Mountain National Bancshares, Inc. and Subsidiaries
 Consolidated Financial Report
 December 31, 2010




---



##### Table of Contents



PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-1CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheets
    
    
    F-2Consolidated statements of operations
    
    
    F-3Consolidated statements of changes in shareholders equity
    
    
    F-4Consolidated statements of cash flows
    
    
    F-5Notes to consolidated financial statements
    
    
    F-6  F-57




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
  F-1




---



##### Table of Contents



2010
    
    
    2009ASSETSCash and due from banks
    
    $
    30,039,647
    
    
    $
    11,750,723Federal funds sold
    
    
    2,536,173
    
    
    
    2,353,913Total cash and cash equivalents
    
    
    32,575,820
    
    
    
    14,104,636Securities available for sale
    
    
    86,316,591
    
    
    
    144,330,068Securities held to maturity, fair value $1,303,080 at December 31, 2010 and
$2,208,236 at December 31, 2009
    
    
    1,317,951
    
    
    
    2,204,303Restricted investments, at cost
    
    
    3,843,150
    
    
    
    3,816,050Loans, net of allowance for loan losses of $10,942,414 at December 31, 2010 and
$11,353,438 at December 31, 2009
    
    
    363,413,050
    
    
    
    396,351,008Investment in partnership
    
    
    4,303,600
    
    
    
    4,198,675Premises and equipment
    
    
    32,600,673
    
    
    
    33,709,282Accrued interest receivable
    
    
    1,495,869
    
    
    
    3,045,290Cash surrender value of company owned life insurance
    
    
    11,774,605
    
    
    
    11,366,270Other real estate owned
    
    
    13,140,698
    
    
    
    14,575,368Other assets
    
    
    6,424,504
    
    
    
    12,038,080Total assets
    
    $
    557,206,511
    
    
    $
    639,739,030LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing demand deposits
    
    $
    47,638,792
    
    
    $
    47,600,944NOW accounts
    
    
    57,344,798
    
    
    
    112,440,413Money market accounts
    
    
    49,701,122
    
    
    
    40,808,892Savings accounts
    
    
    23,733,795
    
    
    
    20,519,998Time deposits
    
    
    271,172,901
    
    
    
    289,243,894Total deposits
    
    
    449,591,408
    
    
    
    510,614,141Securities sold under agreements to repurchase
    
    
    432,016
    
    
    
    1,776,402Accrued interest payable
    
    
    719,133
    
    
    
    605,936Subordinated debentures
    
    
    13,403,000
    
    
    
    13,403,000Federal Home Loan Bank advances
    
    
    55,200,000
    
    
    
    62,900,000Other liabilities
    
    
    2,186,784
    
    
    
    3,070,396Total liabilities
    
    
    521,532,341
    
    
    
    592,369,875Commitments and contingenciesShareholders equity:Preferred stock, no par value; 1,000,000 shares authorized;
0 shares issued and outstanding
    
    
    
    
    
    
    Common stock, $1.00 par value; 10,000,000 shares authorized; 2,631,611
issued and outstanding
    
    
    2,631,611
    
    
    
    2,631,611Additional paid-in capital
    
    
    42,229,713
    
    
    
    42,125,828Retained earnings (deficit)
    
    
    (8,122,476
    )
    
    
    2,328,702Accumulated other comprehensive income (loss)
    
    
    (1,064,678
    )
    
    
    283,014Total shareholders equity
    
    
    35,674,170
    
    
    
    47,369,155Total liabilities and shareholders equity
    
    $
    557,206,511
    
    
    $
    639,739,030
   F-2




---



##### Table of Contents



2010
    
    
    2009INTEREST INCOMELoans
    
    $
    20,674,310
    
    
    $
    25,072,166Taxable securities
    
    
    2,454,381
    
    
    
    5,219,060Tax-exempt securities
    
    
    250,898
    
    
    
    1,053,433Federal funds sold and deposits in other banks
    
    
    76,371
    
    
    
    24,710Total interest income
    
    
    23,455,960
    
    
    
    31,369,369INTEREST EXPENSEDeposits
    
    
    7,837,187
    
    
    
    10,247,527Federal funds purchased
    
    
    3,063
    
    
    
    36,020Repurchase agreements
    
    
    24,250
    
    
    
    91,022Federal Reserve and Federal Home Loan Bank advances
    
    
    2,493,511
    
    
    
    2,592,048Subordinated debentures
    
    
    343,850
    
    
    
    392,016Total interest expense
    
    
    10,701,861
    
    
    
    13,358,633Net interest income
    
    
    12,754,099
    
    
    
    18,010,736Provision for loan losses
    
    
    7,727,200
    
    
    
    11,672,802Net interest income after provision for loan losses
    
    
    5,026,899
    
    
    
    6,337,934NONINTEREST INCOMEService charges on deposit accounts
    
    
    1,642,058
    
    
    
    2,326,614Other fees and commissions
    
    
    1,473,616
    
    
    
    1,262,244Gain on sale of mortgage loans
    
    
    191,163
    
    
    
    146,913Investment gains and losses, net
    
    
    1,511,005
    
    
    
    2,558,612Other than temporary lossTotal impairment loss
    
    
    
    
    
    
    (405,846
    )Loss recognized in other comprehensive income (loss)
    
    
    
    
    
    
    (58,478
    )Net impairment recognized in earnings (loss)
    
    
    
    
    
    
    (347,368
    )Other real estate gains and losses, net
    
    
    34,591
    
    
    
    (1,478,877
    )Other noninterest income
    
    
    897,972
    
    
    
    395,248Total noninterest income
    
    
    5,750,405
    
    
    
    4,863,386NONINTEREST EXPENSESalaries and employee benefits
    
    
    8,322,173
    
    
    
    9,670,008Occupancy expenses
    
    
    1,759,196
    
    
    
    1,698,987FDIC assessment expense
    
    
    1,161,330
    
    
    
    1,537,439Other operating expenses
    
    
    6,247,956
    
    
    
    6,311,308Total noninterest expense
    
    
    17,490,655
    
    
    
    19,217,742Loss before income tax expense (benefit)
    
    
    (6,713,351
    )
    
    
    (8,016,422
    )Income tax expense (benefit)
    
    
    3,737,827
    
    
    
    (3,788,027
    )Net loss
    
    $
    (10,451,178
    )
    
    $
    (4,228,395
    )LOSS PER SHAREBasic
    
    $
    (3.97
    )
    
    $
    (1.61
    )Diluted
    
    $
    (3.97
    )
    
    $
    (1.61
    )
   F-3




---



##### Table of Contents



AccumulatedAdditional
    
    
    Retained
    
    
    Other
    
    
    TotalComprehensive
    
    
    Common
    
    
    Paid-in
    
    
    Earnings
    
    
    Comprehensive
    
    
    ShareholdersIncome (Loss)
    
    
    Stock
    
    
    Capital
    
    
    (Deficit)
    
    
    Income/(Loss)
    
    
    EquityBALANCE, January 1, 2009
    
    
    
    
    
    $
    2,631,611
    
    
    $
    41,952,632
    
    
    $
    6,557,097
    
    
    $
    (147,587
    )
    
    $
    50,993,753Share-based compensation
    
    
    
    
    
    
    
    
    
    
    102,500
    
    
    
    
    
    
    
    
    
    
    
    102,500Tax benefit from exercise of options
    
    
    
    
    
    
    
    
    
    
    70,696
    
    
    
    
    
    
    
    
    
    
    
    70,696Comprehensive income (loss):Net loss
    
    $
    (4,228,395
    )
    
    
    
    
    
    
    
    
    
    
    (4,228,395
    )
    
    
    
    
    
    
    (4,228,395
    )Other comprehensive income, net of tax:Change in unrealized gains (losses) on
securities available-for-sale for which
a portion of an other-than-temporary-
impairment has been recognized in
earnings, net of reclassification
    
    
    58,478
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,478
    
    
    
    58,478Change in unrealized gains (losses) on
securities available-for-sale, net of
reclassification
    
    
    372,123
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    372,123
    
    
    
    372,123Total comprehensive income (loss)
    
    
    (3,797,794
    )BALANCE, December 31, 2009
    
    
    
    
    
    
    2,631,611
    
    
    
    42,125,828
    
    
    
    2,328,702
    
    
    
    283,014
    
    
    
    47,369,155Share-based compensation
    
    
    
    
    
    
    
    
    
    
    103,885
    
    
    
    
    
    
    
    
    
    
    
    103,885Comprehensive income (loss):Net loss
    
    
    (10,451,178
    )
    
    
    
    
    
    
    
    
    
    
    (10,451,178
    )
    
    
    
    
    
    
    (10,451,178
    )Other comprehensive income, net of tax:Change in unrealized gains (losses) on
securities available-for-sale, net of
reclassification
    
    
    (1,347,692
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,347,692
    )
    
    
    (1,347,692
    )Total comprehensive income (loss)
    
    $
    (11,798,870
    )BALANCE, December 31, 2010
    
    
    
    
    
    $
    2,631,611
    
    
    $
    42,229,713
    
    
    $
    (8,122,476
    )
    
    $
    (1,064,678
    )
    
    $
    35,674,170
   F-4




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##### Table of Contents



2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (10,451,178
    )
    
    $
    (4,228,395
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation
    
    
    1,653,848
    
    
    
    1,430,157Net realized gains on securities available for sale
    
    
    (1,499,481
    )
    
    
    (2,558,612
    )Net realized gains on securities held to maturity
    
    
    (11,524
    )
    
    
    Securities impairment loss recognized in earnings
    
    
    
    
    
    
    347,368Net amortization on available for sale securities
    
    
    818,917
    
    
    
    790,954Increase in held to maturity due to accretion
    
    
    (61,220
    )
    
    
    (87,259
    )Provision for loan losses
    
    
    7,727,200
    
    
    
    11,672,802Net (gain) loss on other real estate
    
    
    (34,591
    )
    
    
    1,478,877Deferred income taxes, net of change in valuation allowance
    
    
    (3,737,827
    )
    
    
    (3,877,978
    )Gross mortgage loans originated for sale
    
    
    (15,340,608
    )
    
    
    (20,078,046
    )Gross proceeds from sale of mortgage loans
    
    
    15,315,271
    
    
    
    20,413,759Gain on sale of mortgage loans
    
    
    (191,163
    )
    
    
    (146,913
    )Increase in cash surrender value of life insurance
    
    
    (408,335
    )
    
    
    (287,562
    )Investment in partnership
    
    
    (104,925
    )
    
    
    (80,713
    )Share-based compensation
    
    
    103,885
    
    
    
    102,500Tax benefit from exercise of options
    
    
    
    
    
    
    (70,696
    )Change in operating assets and liabilities:Accrued interest receivable
    
    
    1,549,421
    
    
    
    (307,471
    )Accrued interest payable
    
    
    113,197
    
    
    
    (416,985
    )Other assets and liabilities
    
    
    7,952,384
    
    
    
    (6,620,253
    )Net cash provided by (used in) operating activities
    
    
    3,393,271
    
    
    
    (2,524,466
    )CASH FLOWS FROM INVESTING ACTIVITIESActivity in available-for-sale securities:Proceeds from sales
    
    
    103,501,336
    
    
    
    89,957,394Proceeds from maturities, prepayments and calls
    
    
    339,012,432
    
    
    
    142,591,220Purchases
    
    
    (384,212,916
    )
    
    
    (250,277,064
    )Activity in held-to-maturity securities:Proceeds from sales
    
    
    520,000
    
    
    
    Purchases of restricted investments
    
    
    (27,100
    )
    
    
    (125,900
    )Loan originations and principal collections, net
    
    
    24,475,863
    
    
    
    1,436,719Purchase of premises and equipment
    
    
    (325,339
    )
    
    
    (3,655,206
    )Proceeds from sale of other real estate
    
    
    2,200,756
    
    
    
    1,228,836Net cash provided by (used in) investing activities
    
    
    85,145,032
    
    
    
    (18,844,001
    )CASH FLOWS FROM FINANCING ACTIVITIESNet (decrease) increase in deposits
    
    
    (61,022,733
    )
    
    
    55,948,195Proceeds from Federal Reserve/Federal Home Loan Bank advances
    
    
    43,000,000
    
    
    
    31,000,000Matured Federal Reserve/Federal Home Loan Bank advances
    
    
    (50,700,000
    )
    
    
    (41,000,000
    )Net decrease in federal funds purchased
    
    
    
    
    
    
    (22,580,000
    )Net decrease in securities sold under
agreements to repurchase
    
    
    (1,344,386
    )
    
    
    (2,555,463
    )Tax benefit from exercise of options
    
    
    
    
    
    
    70,696Net cash (used in) provided by financing activities
    
    
    (70,067,119
    )
    
    
    20,883,428NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    18,471,184
    
    
    
    (485,039
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    14,104,636
    
    
    
    14,589,675CASH AND CASH EQUIVALENTS, end of period
    
    $
    32,575,820
    
    
    $
    14,104,636SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for:Interest
    
    $
    10,588,664
    
    
    $
    13,775,618Income taxes
    
    
    165,000
    
    
    
    520,000Non-cash investing and financing activities:Transfers from loans to other real estate owned
    
    
    3,245,233
    
    
    
    13,359,756Loans advanced for sales of other real estate
    
    
    2,293,838
    
    
    
    7,871,855
   F-5




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##### Table of Contents



Note 1  Summary of Significant Accounting Policies
           F-6




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
          F-7




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
          F-8




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
        F-9




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
     F-10




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
      F-11




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
         F-12




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
          F-13




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
             F-14




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
              F-15




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
          F-16




---



##### Table of Contents



Note 2  Securities
  2010Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U. S. Government
securities
    
    $
    249,879
    
    
    $
    
    
    
    $
    (13
    )
    
    $
    249,866Obligations of states and
political subdivisions
    
    
    5,201,492
    
    
    
    17,407
    
    
    
    (296,786
    )
    
    
    4,922,113Mortgage-backed
securities  residential
    
    
    81,754,184
    
    
    
    134,557
    
    
    
    (744,129
    )
    
    
    81,144,612$
    87,205,555
    
    
    $
    151,964
    
    
    $
    (1,040,928
    )
    
    $
    86,316,591Securities held to maturity:Obligations of states and
political subdivisions
    
    $
    1,317,951
    
    
    $
    
    
    
    $
    (14,871
    )
    
    $
    1,303,080
 2009Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U. S. Government
securities
    
    $
    3,250,638
    
    
    $
    
    
    
    $
    (87
    )
    
    $
    3,250,551U. S. Government
agencies
    
    
    6,997,816
    
    
    
    89
    
    
    
    (99,536
    )
    
    
    6,898,369Obligations of states and
political subdivisions
    
    
    19,977,724
    
    
    
    257,496
    
    
    
    (111,291
    )
    
    
    20,123,929Mortgage-backed
securities  residential
    
    
    113,645,162
    
    
    
    1,065,493
    
    
    
    (653,436
    )
    
    
    114,057,219$
    143,871,340
    
    
    $
    1,323,078
    
    
    $
    (864,350
    )
    
    $
    144,330,068Securities held to maturity:Obligations of states and
political subdivisions
    
    $
    2,204,303
    
    
    $
    63,980
    
    
    $
    (60,047
    )
    
    $
    2,208,236
  F-17




---



##### Table of Contents



Note 2  Securities (continued)
  2010
    
    
    2009Proceeds
    
    $
    103,501,336
    
    
    $
    89,957,394Gross gains
    
    
    1,570,376
    
    
    
    2,562,423Gross losses
    
    
    (59,371
    )
    
    
    (3,811
    )
   Securities Available for Sale
    
    
    Securities Held to MaturityAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueWithin one year
    
    $
    249,879
    
    
    $
    249,866
    
    
    $
    
    
    
    $
    One to five years
    
    
    268,535
    
    
    
    263,624
    
    
    
    
    
    
    
    Five to ten years
    
    
    1,184,661
    
    
    
    1,189,545
    
    
    
    722,012
    
    
    
    710,900Beyond ten years
    
    
    3,748,296
    
    
    
    3,468,944
    
    
    
    595,939
    
    
    
    592,180Mortgage-backed
securities  residential
    
    
    81,754,184
    
    
    
    81,144,612
    
    
    
    
    
    
    
    $
    87,205,555
    
    
    $
    86,316,591
    
    
    $
    1,317,951
    
    
    $
    1,303,080
    F-18




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##### Table of Contents



Note 2  Securities (continued)
  December 31, 2010:
 Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securties
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossU. S. Government
securities
    
    $
    249,866
    
    
    $
    (13
    )
    
    $
    
    
    
    $
    
    
    
    $
    249,866
    
    
    $
    (13
    )Obligations of states and
political subdivisions
    
    
    3,632,820
    
    
    
    (112,755
    )
    
    
    1,571,970
    
    
    
    (198,902
    )
    
    
    5,204,790
    
    
    
    (311,657
    )Mortgage-backed
securities  residential
    
    
    57,369,268
    
    
    
    (744,129
    )
    
    
    
    
    
    
    
    
    
    
    57,369,268
    
    
    
    (744,129
    )Total temporarily impaired
    
    $
    61,251,954
    
    
    $
    (856,897
    )
    
    $
    1,571,970
    
    
    $
    (198,902
    )
    
    $
    62,823,924
    
    
    $
    (1,055,799
    )
 December 31, 2009:
 Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securties
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossU. S. Government
securities
    
    $
    252,373
    
    
    $
    (87
    )
    
    $
    
    
    
    $
    
    
    
    $
    252,373
    
    
    $
    (87
    )U. S. Government
agencies
    
    
    4,899,769
    
    
    
    (99,536
    )
    
    
    
    
    
    
    
    
    
    
    4,899,769
    
    
    
    (99,536
    )Obligations of states and
political subdivisions
    
    
    4,797,788
    
    
    
    (171,338
    )
    
    
    
    
    
    
    
    
    
    
    4,797,788
    
    
    
    (171,338
    )Mortgage-backed
securities  residential
    
    
    46,712,247
    
    
    
    (653,436
    )
    
    
    
    
    
    
    
    
    
    
    46,712,247
    
    
    
    (653,436
    )Total temporarily impaired
    
    $
    56,662,177
    
    
    $
    (924,397
    )
    
    $
    
    
    
    $
    
    
    
    $
    56,662,177
    
    
    $
    (924,397
    )
   F-19




---



##### Table of Contents



Note 2  Securities (continued)
 Mortgage-Backed Securities
  Obligations of States and Political Subdivisions
  Other-Than-Temporary-Impairment
   F-20




---



##### Table of Contents



Note 2  Securities (continued)
  Other Securities
   F-21




---



##### Table of Contents



Note 3  Loans and Allowance for Loan Losses
  2010
    
    
    2009Mortgage loans on real estate:Residential 1-4 family
    
    $
    86,402,948
    
    
    $
    88,491,997Residential multifamily
    
    
    6,146,427
    
    
    
    7,259,301Commercial
    
    
    133,917,383
    
    
    
    138,374,082Construction
    
    
    83,543,331
    
    
    
    99,771,212Second mortgages
    
    
    8,879,885
    
    
    
    7,127,228Equity lines of credit
    
    
    25,391,414
    
    
    
    29,370,304344,281,388
    
    
    
    370,394,124Commercial loans
    
    
    24,944,178
    
    
    
    30,386,527Consumer installment loans:Personal
    
    
    2,854,531
    
    
    
    4,512,571Credit cards
    
    
    2,275,367
    
    
    
    2,411,2245,129,898
    
    
    
    6,923,795Total loans
    
    
    374,355,464
    
    
    
    407,704,446Less: Allowance for loan losses
    
    
    (10,942,414
    )
    
    
    (11,353,438
    )Loans, net
    
    $
    363,413,050
    
    
    $
    396,351,008
  F-22




---



##### Table of Contents



Note 3  Loans and Allowance for Loan Losses (continued)
  2010
    
    
    2009Balance, beginning of year
    
    $
    11,353,438
    
    
    $
    5,292,028Provision for loan losses
    
    
    7,727,200
    
    
    
    11,672,802Loans charged-off
    
    
    (8,593,679
    )
    
    
    (5,890,874
    )Recoveries of loans previously charged-off
    
    
    455,455
    
    
    
    279,482Balance, end of year
    
    $
    10,942,414
    
    
    $
    11,353,438
    F-23




---



##### Table of Contents



Note 3  Loans and Allowance for Loan Losses (continued)
  Construction and
    
    
    Residential
    
    
    Commercial
    
    
    
    
    
    
    Consumer /
    
    
    CreditDevelopment
    
    
    Real Estate
    
    
    Real Estate
    
    
    Commercial
    
    
    Other
    
    
    Cards
    
    
    Unallocated
    
    
    TotalAllowance for loan losses:Ending allowance balance
attributable to loans:Individually evaluated for
impairment
    
    $
    1,647,319
    
    
    $
    2,444,296
    
    
    $
    617,123
    
    
    $
    623
    
    
    $
    480
    
    
    $
    
    
    
    $
    
    
    
    $
    4,709,841Collectively evaluated for
impairment
    
    
    1,444,541
    
    
    
    1,653,029
    
    
    
    1,444,301
    
    
    
    395,080
    
    
    
    97,188
    
    
    
    121,268
    
    
    
    1,077,166
    
    
    
    6,232,573Total ending allowance
balance
    
    $
    3,091,860
    
    
    $
    4,097,325
    
    
    $
    2,061,424
    
    
    $
    395,703
    
    
    $
    97,668
    
    
    $
    121,268
    
    
    $
    1,077,166
    
    
    $
    10,942,414Loans:Loans individually evaluated
for impairment
    
    $
    41,517,256
    
    
    $
    29,181,876
    
    
    $
    21,528,757
    
    
    $
    113,250
    
    
    $
    15,189
    
    
    $
    
    
    
    $
    
    
    
    $
    92,356,328Loans collectively evaluated
for impairment
    
    
    42,026,075
    
    
    
    97,638,798
    
    
    
    112,388,626
    
    
    
    24,830,928
    
    
    
    2,839,342
    
    
    
    2,275,367
    
    
    
    
    
    
    
    281,999,136Total ending loan balance
    
    $
    83,543,331
    
    
    $
    126,820,674
    
    
    $
    133,917,383
    
    
    $
    24,944,178
    
    
    $
    2,854,531
    
    
    $
    2,275,367
    
    
    $
    
    
    
    $
    374,355,464
  2010
    
    
    2009Year-end loans with allocated allowance
for loan losses
    
    $
    69,501,838
    
    
    $
    37,952,662Year-end loans with no allocated allowance
for loan losses
    
    
    22,854,490
    
    
    
    25,194,329Total impaired loans
    
    
    92,356,328
    
    
    
    63,146,991Allowance for loan losses on impaired loans
    
    
    4,709,841
    
    
    
    5,367,678Average of individually impaired loans
during the year
    
    $
    83,699,963
    
    
    
    54,479,634Amount of partial charge-offs related to
impaired loans above
    
    
    5,051,238
    
    
    
    2,218,029
  F-24




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##### Table of Contents



Note 3  Loans and Allowance for Loan Losses (continued)
  Unpaid
    
    
    
    
    
    
    Allowance forPrincipal
    
    
    Recorded
    
    
    Loan LossesBalance
    
    
    Investment
    
    
    AllocatedWith no related allowance recorded:Construction and development
    
    $
    18,005,132
    
    
    $
    13,216,014
    
    
    $
    Commercial real estateCommercial mortgage
    
    
    5,559,433
    
    
    
    4,834,417
    
    
    
    Residential real estateResidential mortgage
    
    
    4,357,820
    
    
    
    4,336,359
    
    
    
    Home equity and junior
liens
    
    
    467,700
    
    
    
    467,700
    
    
    
    Total residential real estate
    
    
    4,825,520
    
    
    
    4,804,059
    
    
    
    Total with no related allowance recorded
    
    $
    28,390,085
    
    
    $
    22,854,490
    
    
    $
    With an allowance recorded:Construction and development
    
    $
    28,504,574
    
    
    $
    28,301,242
    
    
    $
    1,647,319Commercial real estateCommercial mortgage
    
    
    16,742,796
    
    
    
    16,694,340
    
    
    
    617,123CommercialCommercial and industrial
    
    
    113,250
    
    
    
    113,250
    
    
    
    623Residential real estateResidential mortgage
    
    
    22,349,306
    
    
    
    22,297,635
    
    
    
    2,334,970Home equity and junior
liens
    
    
    388,063
    
    
    
    388,063
    
    
    
    17,283Multi-family
    
    
    1,692,119
    
    
    
    1,692,119
    
    
    
    92,043Total residential real estate
    
    
    24,429,488
    
    
    
    24,377,817
    
    
    
    2,444,296ConsumerOther
    
    
    15,189
    
    
    
    15,189
    
    
    
    480Total with an allowance recorded
    
    $
    69,805,297
    
    
    $
    69,501,838
    
    
    $
    4,709,841Total impaired loans
    
    $
    98,195,382
    
    
    $
    92,356,328
    
    
    $
    4,709,841
  F-25




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##### Table of Contents



Note 3  Loans and Allowance for Loan Losses (continued)
   2010
    
    
    2009Loans past due over 90 days still on accrual
    
    $
    432,438
    
    
    $
    67,634Nonaccrual loans
    
    
    53,005,380
    
    
    
    40,548,546
   Loans Past DueOver 90 DaysNonaccrual
    
    
    Still AccruingConstruction and development
    
    $
    27,929,095
    
    
    $
    Commercial real estateCommercial mortgage
    
    
    6,362,017
    
    
    
    413,283CommercialCommercial and industrial
    
    
    67,234
    
    
    
    Residential real estateResidential mortgage
    
    
    17,446,374
    
    
    
    Home equity and junior
liens
    
    
    1,200,660
    
    
    
    84Total residential real estate
    
    
    18,647,034
    
    
    
    84Credit cards
    
    
    
    
    
    
    19,071Total nonperforming loans
    
    $
    53,005,380
    
    
    $
    432,438
  F-26




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##### Table of Contents



Note 3  Loans and Allowance for Loan Losses (continued)
  30-59
    
    
    60-89
    
    
    Greater ThanDays
    
    
    Days
    
    
    90 Days
    
    
    Total
    
    
    
    
    
    
    TotalPast Due
    
    
    Past Due
    
    
    Past Due
    
    
    Past Due
    
    
    Current
    
    
    LoansConstruction and development
    
    $
    264,762
    
    
    $
    49,071
    
    
    $
    394,151
    
    
    $
    707,984
    
    
    $
    82,835,347
    
    
    $
    83,543,331Commercial real estateCommercial mortgage
    
    
    214,642
    
    
    
    326,019
    
    
    
    2,573,021
    
    
    
    3,113,682
    
    
    
    130,803,701
    
    
    
    133,917,383CommercialCommercial and industrial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,944,178
    
    
    
    24,944,178Residential real estateResidential mortgage
    
    
    947,887
    
    
    
    2,579,749
    
    
    
    
    
    
    
    3,527,636
    
    
    
    82,875,312
    
    
    
    86,402,948Home equity and junior
liens
    
    
    
    
    
    
    408,909
    
    
    
    61,800
    
    
    
    470,709
    
    
    
    33,800,590
    
    
    
    34,271,299Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,146,427
    
    
    
    6,146,427Total residential real estate
    
    
    947,887
    
    
    
    2,988,658
    
    
    
    61,800
    
    
    
    3,998,345
    
    
    
    122,822,329
    
    
    
    126,820,674ConsumerOther
    
    
    13,685
    
    
    
    10,601
    
    
    
    
    
    
    
    24,286
    
    
    
    2,830,245
    
    
    
    2,854,531Credit cards
    
    
    42,996
    
    
    
    1,082
    
    
    
    19,071
    
    
    
    63,149
    
    
    
    2,212,218
    
    
    
    2,275,367Total
    
    $
    1,483,972
    
    
    $
    3,375,431
    
    
    $
    3,048,043
    
    
    $
    7,907,446
    
    
    $
    366,448,018
    
    
    $
    374,355,464
    F-27




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##### Table of Contents



Note 3  Loans and Allowance for Loan Losses (continued)
    Pass:
    
    Loans that are not adversely rated, are contractually current
as to principal and interest and are otherwise in compliance with the
contractual terms of the loan or lease agreement. Management believes that
there is a low likelihood of loss related to those loans that are considered
pass.Special Mention:
    
    Loans classified as special mention have a potential weakness that
deserves managements close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan
or of the institutions credit position at some future date.Substandard/
Accruing:
    
    Loans classified as substandard are inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Loans so classified have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the deficiencies are
not corrected.Substandard/
Nonaccrual:
    
    A loan classified as nonaccrual has all the deficiencies of a loan
graded substandard but collection of the full amount of principal and interest
owed is uncertain or unlikely and collateral support, if any, may be weak.Doubtful:
    
    Loans classified as doubtful have all the weaknesses inherent in those
classified as substandard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently existing
estimations, facts, conditions and values, highly questionable and improbable.
Doubtful loans include only the portion of each specific loan deemed
uncollectible and the classification can change as certain current information
and facts are ascertained.
  F-28




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##### Table of Contents



Note 3  Loans and Allowance for Loan Losses (continued)
  Not
    
    
    
    
    
    
    Special
    
    
    Substandard
    
    
    SubstandardRated
    
    
    Pass
    
    
    Mention
    
    
    Accruing
    
    
    Nonaccrual
    
    
    DoubtfulConstruction and development
    
    $
    
    
    
    $
    36,085,885
    
    
    $
    283,817
    
    
    $
    19,244,534
    
    
    $
    26,977,265
    
    
    $
    951,830Commercial real estateCommercial mortgage
    
    
    
    
    
    
    99,648,357
    
    
    
    1,044,251
    
    
    
    26,862,758
    
    
    
    6,362,017
    
    
    
    CommercialCommercial and industrial
    
    
    
    
    
    
    24,274,283
    
    
    
    207,244
    
    
    
    395,417
    
    
    
    67,234
    
    
    
    Residential real estateResidential mortgage
    
    
    
    
    
    
    54,331,450
    
    
    
    2,905,416
    
    
    
    11,719,708
    
    
    
    17,446,374
    
    
    
    Home equity and junior liens
    
    
    
    
    
    
    30,841,092
    
    
    
    668,456
    
    
    
    1,561,091
    
    
    
    1,200,660
    
    
    
    Multi-family
    
    
    
    
    
    
    4,454,308
    
    
    
    
    
    
    
    1,692,119
    
    
    
    
    
    
    
    Total residential real estate
    
    
    
    
    
    
    89,626,850
    
    
    
    3,573,872
    
    
    
    14,972,918
    
    
    
    18,647,034
    
    
    
    ConsumerOther
    
    
    
    
    
    
    2,755,139
    
    
    
    40,627
    
    
    
    58,765
    
    
    
    
    
    
    
    Credit cards
    
    
    2,275,367
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    2,275,367
    
    
    $
    252,390,514
    
    
    $
    5,149,811
    
    
    $
    61,534,392
    
    
    $
    52,053,550
    
    
    $
    951,830
  F-29




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##### Table of Contents



Note 4  Bank Premises and Equipment
  2010
    
    
    2009Land
    
    $
    9,694,709
    
    
    $
    9,694,709Buildings and improvements
    
    
    22,865,665
    
    
    
    22,753,470Furniture, fixtures and equipment
    
    
    9,056,630
    
    
    
    8,934,48641,617,004
    
    
    
    41,382,665Accumulated depreciation
    
    
    (9,016,331
    )
    
    
    (7,673,383
    )$
    32,600,673
    
    
    $
    33,709,282
  Note 5  Deposits
   2011
    
    $
    183,855,6112012
    
    
    58,105,3692013
    
    
    18,647,6032014
    
    
    1,404,4562015
    
    
    9,159,862Total
    
    $
    271,172,901
   F-30




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##### Table of Contents



Note 6  Income Taxes (Benefits)
  2010
    
    
    2009Current tax expense
    
    $
    
    
    
    $
    89,951Deferred tax expense (benefit)
    
    
    (3,737,827
    )
    
    
    (3,877,978
    )Income tax expense (benefit)
    
    $
    (3,737,827
    )
    
    $
    (3,788,027
    )
  2010
    
    
    2009Expected tax at statutory rates
    
    $
    (2,283,000
    )
    
    $
    (2,726,000
    )Increase (decrease) resulting from tax effect of:State income taxes, net of federal tax
    
    
    (377,063
    )
    
    
    (544,004
    )Increase in cash surrender value of life insurance
    
    
    (138,834
    )
    
    
    (94,601
    )Tax exempt interest
    
    
    (64,204
    )
    
    
    (347,420
    )General business credits, net of basis reduction
    
    
    (158,400
    )
    
    
    (132,000
    )Other
    
    
    (97,785
    )Valuation allowance change
    
    
    6,857,113
    
    
    
    55,998Income tax expense (benefit)
    
    $
    3,737,827
    
    
    $
    (3,788,027
    )
  F-31




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##### Table of Contents



Note 6  Income Taxes (Benefits) (continued)
  2010
    
    
    2009Deferred tax assets:Allowance for loan losses
    
    $
    4,107,907
    
    
    $
    4,214,292Deferred compensation
    
    
    562,754
    
    
    
    419,399Unrealized loss on securities available for sale
    
    
    339,693
    
    
    
    Net operating loss
    
    
    2,637,959
    
    
    
    371,065Nonaccrual loans
    
    
    1,110,990
    
    
    
    472,359Tax credits
    
    
    610,516
    
    
    
    150,816Other real estate owned
    
    
    417,928
    
    
    
    488,685Other
    
    
    336,903
    
    
    
    315,770Total deferred tax assets
    
    
    10,124,650
    
    
    
    6,432,386Deferred tax liabilities:Accelerated depreciation
    
    
    (552,177
    )
    
    
    (604,553
    )Unrealized gain on securities available for sale
    
    
    
    
    
    
    (175,714
    )Income from subsidiary
    
    
    
    
    
    
    (49,823
    )Investment in partnership
    
    
    (367,200
    )
    
    
    (72,000
    )Other
    
    
    (400,324
    )
    
    
    (358,491
    )Total deferred tax liabilities
    
    
    (1,319,701
    )
    
    
    (1,260,581
    )Valuation allowance
    
    
    (7,372,520
    )
    
    
    Total net deferred tax assets
    
    $
    1,432,429
    
    
    $
    5,171,805
   F-32




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##### Table of Contents



Note 6  Income Taxes (Benefits) (continued)
       F-33




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##### Table of Contents



Note 7  Federal Home Loan Bank Advances
  2010
    
    
    2009Long-term advance requiring monthly interest payments
at 4.32% fixed, principal due in June 2010
    
    $
    
    
    
    $
    200,000Long-term callable advance requiring monthly interest payments
at 4.39% fixed, principal due in November 2011
    
    
    
    
    
    
    7,500,000Long-term advance requiring monthly interest payments
at 4.47% fixed, principal due in June 2012
    
    
    200,000
    
    
    
    200,000Long-term callable advance requiring monthly interest payments
at 4.25% fixed, principal due in January 2017
    
    
    10,000,000
    
    
    
    10,000,000Long-term callable advance requiring monthly interest payments
at 4.15% fixed, principal due in April 2017
    
    
    10,000,000
    
    
    
    10,000,000Long-term callable advance requiring monthly interest payments
at 4.27% fixed, principal due in May 2017
    
    
    10,000,000
    
    
    
    10,000,000Long-term callable advance requiring monthly interest payments
at 4.68% fixed, principal due in June 2017
    
    
    10,000,000
    
    
    
    10,000,000Long-term callable advance requiring monthly interest payments
at 3.36% fixed, principal due in December 2012
    
    
    5,000,000
    
    
    
    5,000,000Long-term callable advance requiring monthly interest payments
at 3.46% fixed, principal due in December 2014
    
    
    5,000,000
    
    
    
    5,000,000Long-term callable advance requiring monthly interest payments
at 3.13% fixed, principal due in January 2015
    
    
    5,000,000
    
    
    
    5,000,000$
    55,200,000
    
    
    $
    62,900,000
  2012
    
    
    5,200,0002014
    
    
    5,000,0002015
    
    
    5,000,0002017
    
    
    40,000,000Total
    
    $
    55,200,000
  F-34




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##### Table of Contents



Note 7  Federal Home Loan Bank Advances (continued)
  Note 8  Subordinated Debentures
    F-35




---



##### Table of Contents



Note 8  Subordinated Debentures (continued)
       F-36




---



##### Table of Contents



Note 9  Securities Sold Under Agreements to Repurchase
  2010
    
    
    2009Weighted average borrowing rate at year-end
    
    
    2.08
    %
    
    
    1.52
    %Weighted average borrowing rate during the year
    
    
    1.58
    %
    
    
    2.12
    %Average daily balance during the year
    
    $
    1,535,058
    
    
    $
    4,283,833Maximum month-end balance during the year
    
    
    3,198,689
    
    
    
    7,872,502Balance at year-end
    
    
    432,016
    
    
    
    1,776,402
 Note 10  Employee Benefit Plans
     F-37




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##### Table of Contents



Note 11  Leases
     2011
    
    $
    178,2772012
    
    
    160,5012013
    
    
    135,4022014
    
    
    57,1322015
    
    
    33,327Thereafter
    
    
    Total
    
    $
    564,639
  F-38




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##### Table of Contents



Note 12  Financial Instruments with Off-Balance Sheet Risk
  2010
    
    
    2009(dollars in thousands)Commitments to extend credit
    
    $
    41,155
    
    
    $
    50,702Standby letters of credit
    
    
    5,288
    
    
    
    5,801Totals
    
    $
    46,443
    
    
    $
    56,503
    Note 13  Fair Value
      F-39




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##### Table of Contents



Note 13  Fair Value (continued)
  Investment Securities Available for Sale
 Impaired Loans
 Other Real Estate
  F-40




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##### Table of Contents



Note 13  Fair Value (continued)
 Assets and Liabilities Measured on a Recurring Basis
 The following table summarizes assets and liabilities measured at fair value on a recurring
basis as of December 31, 2010 and December 31, 2009, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value:
 Fair Value Measurements atDecember 31, 2010 Using:Significant OtherObservable InputsCarrying Value
    
    
    (Level 2)Assets:Available for sale securities:U. S. Government securities
    
    $
    249,866
    
    
    $
    249,866Obligations of states and
political subdivisions
    
    
    4,922,113
    
    
    
    4,922,113Mortgage-backed securities
-residential
    
    
    81,144,612
    
    
    
    81,144,612Total available for sale securities
    
    $
    86,316,591
    
    
    $
    86,316,591
 Fair Value Measurements atDecember 31, 2009 Using:Significant OtherObservable InputsCarrying Value
    
    
    (Level 2)Assets:Available for sale securities:U. S. Government securities
    
    $
    3,250,551
    
    
    $
    3,250,551U. S. Government sponsored
entities and agencies
    
    
    6,898,369
    
    
    
    6,898,369Obligations of states and
political subdivisions
    
    
    20,123,929
    
    
    
    20,123,929Mortgage-backed securities
-residential
    
    
    114,057,219
    
    
    
    114,057,219Total available for sale securities
    
    $
    144,330,068
    
    
    $
    144,330,068
 There were no significant transfers between Level 1 and Level 2 during 2010.
  F-41




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##### Table of Contents



Note 13  Fair Value (continued)
 Assets and Liabilities Measured on a Non-Recurring Basis
 Certain assets and liabilities are measured at fair value on a nonrecurring basis, that is,
the instruments are not measured at fair value on an ongoing basis but are subject to fair
value adjustments in certain circumstances (for example, when there is evidence of
impairment). The following table summarizes assets and liabilities measured at fair value on
a non-recurring basis as of December 31, 2010 and December 31, 2009, segregated by the level
of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 Fair Value Measurements atDecember 31, 2010 Using:SignificantUnobservable InputsCarrying Value
    
    
    (Level 3)Assets:Impaired loans:Construction and development
    
    $
    8,826,040
    
    
    $
    8,826,040Commercial real estate
    
    
    3,378,152
    
    
    
    3,378,152Residential real estate
    
    
    4,045,756
    
    
    
    4,045,756Total impaired loans
    
    
    16,249,948
    
    
    
    16,249,948Other real estate:Construction and development
    
    
    2,229,161
    
    
    
    2,229,161Commercial real estate
    
    
    1,404,833
    
    
    
    1,404,833Residential real estate
    
    
    7,518,670
    
    
    
    7,518,670Total other real estate
    
    
    11,152,664
    
    
    
    11,152,664Total Assets Measured at Fair
Value on a Non-Recurring Basis
    
    $
    27,402,612
    
    
    $
    27,402,612
 Fair Value Measurements atDecember 31, 2009 Using:SignificantUnobservable InputsCarrying Value
    
    
    (Level 3)Assets:Impaired Loans
    
    $
    8,512,991
    
    
    $
    8,512,991Other real estate
    
    
    12,019,079
    
    
    
    12,019,079Total Assets Measured at Fair
Value on a Non-Recurring Basis
    
    $
    20,532,070
    
    
    $
    20,532,070
  F-42




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##### Table of Contents



Note 13  Fair Value (continued)
 At December 31, 2010, impaired loans measured at fair value, which are evaluated for
impairment using the fair value of collateral, had a carrying amount of $17,718,189, with a
valuation allowance of $1,468,241 resulting in an additional provision for loan losses of
$4,514,585 for the year ended December 31, 2010. At December 31, 2009, impaired loans
measured at fair value had a carrying amount of $8,512,991, with no valuation allowance.
During 2009, $2,218,028 of outstanding principal was charged off on these loans resulting in
an additional provision for loan losses of $2,218,028 for the year ended December 31, 2009.
Impaired loans carried at fair value include loans that have been written down to fair value
through the partial charge-off of principal balance. Accordingly, these loans do not have a
specific valuation allowance as their balances represent fair value.
 The December 31, 2010 carrying amount of ORE includes net valuation adjustments of
approximately $1,211,000. The December 31, 2009 carrying amount of ORE includes net
valuation adjustments of approximately $938,000. Valuation adjustments include both charge
offs and holding gains and losses. The fair value of ORE is based upon appraisals performed
by qualified, licensed appraisers.
 Fair Value of Financial Instruments
 Fair value estimates are made at a specific point in time, based on relevant market
information about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Companys entire holdings
of a particular financial instrument. Because no market exists for a significant portion of
the Companys financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective in nature;
involve uncertainties and matters of judgment; and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. Accordingly, the
aggregate fair value amounts presented are not intended to represent the underlying value of
the Company.
 Fair value estimates are based on existing financial instruments without attempting to
estimate the value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments. The following methods and assumptions were
used to estimate the fair value of each class of financial instruments:
 Cash and cash equivalents:
 For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
  F-43




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##### Table of Contents



Note 13  Fair Value (continued)
 Investment Securities:
 The fair value of securities is estimated as previously described for securities available
for sale, and in a similar manner for securities held to maturity.
 Restricted investments:
 Restricted investments consist of Federal Home Loan Bank and Federal Reserve Bank stock. It
is not practicable to determine the fair value due to restrictions placed on the
transferability of the stock.
 Loans:
 The fair value of loans is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates, adjusted for credit risk and
servicing costs. The estimate of maturity is based on historical experience with repayments
for each loan classification, modified, as required, by an estimate of the effect of current
economic and lending conditions. The allowance for loan losses is considered a reasonable
discount for credit risk.
 Deposits:
 The fair value of deposits with no stated maturity, such as demand deposits, money market
accounts, and savings deposits, is equal to the amount payable on demand. The fair value of
time deposits is based on the discounted value of contractual cash flows. The discount rate
is estimated using the rates currently offered for deposits of similar remaining maturities.
 Federal funds purchased and securities sold under agreements to repurchase:
 The estimated value of these liabilities, which are extremely short term, approximates their
carrying value.
 Subordinated debentures:
 For the subordinated debentures with a floating interest rate tied to LIBOR, the fair value
is based on the discounted value of contractual cash flows. The discount rate is estimated
using the most recent offering rates available for subordinated debentures of similar
amounts and remaining maturities.
  F-44




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Note 13  Fair Value (continued)
 Federal Home Loan Bank advances:
 For FHLB advances the fair value is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for FHLB advances of
similar amounts and remaining maturities.
 Accrued interest receivable and payable:
 The carrying amounts of accrued interest receivable and payable approximate their fair
value.
 Commitments to extend credit, letters of credit and lines of credit:
 The fair value of commitments is estimated using the 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 values of these commitments are insignificant and are not included in the
table below.
  F-45




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Note 13  Fair Value (continued)
 The carrying amounts and estimated fair values of the Companys financial instruments at
December 31, 2010 and December 31, 2009, not previously presented, are as follows (in
thousands):
 December 31, 2010
    
    
    December 31, 2009Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    32,576
    
    
    $
    32,576
    
    
    $
    14,105
    
    
    $
    14,105Investment securities held to maturity
    
    
    1,318
    
    
    
    1,303
    
    
    
    2,204
    
    
    
    2,208Restricted investments
    
    
    3,843
    
    
    
    N/A
    
    
    
    3,816
    
    
    
    N/ALoans, net
    
    
    363,413
    
    
    
    358,587
    
    
    
    396,351
    
    
    
    396,254Accrued interest receivable
    
    
    1,496
    
    
    
    1,496
    
    
    
    3,045
    
    
    
    3,045Liabilities:Noninterest-bearing demand deposits
    
    $
    47,639
    
    
    $
    47,639
    
    
    $
    47,601
    
    
    $
    47,601NOW accounts
    
    
    57,345
    
    
    
    57,345
    
    
    
    112,440
    
    
    
    112,440Savings and money market accounts
    
    
    73,435
    
    
    
    73,435
    
    
    
    61,329
    
    
    
    61,329Time deposits
    
    
    271,173
    
    
    
    272,304
    
    
    
    289,244
    
    
    
    290,534Subordinated debentures
    
    
    13,403
    
    
    
    7,276
    
    
    
    13,403
    
    
    
    6,922Federal funds purchased and securities
sold under agreements to repurchase
    
    
    432
    
    
    
    432
    
    
    
    1,776
    
    
    
    1,776Federal Reserve/Federal Home Loan
Bank advances
    
    
    55,200
    
    
    
    61,136
    
    
    
    62,900
    
    
    
    67,989Accrued interest payable
    
    
    719
    
    
    
    719
    
    
    
    606
    
    
    
    606
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Note 14  Stock Options
 The Company has a stock option plan that is administered by the Board of Directors and
provides for both incentive stock options and nonqualified stock options. The exercise price
of each option shall not be less than 100 percent of the fair market value of the common
stock on the date of grant. All options have been granted at the fair market value of the
 shares at the date of grant. The maximum term for each option is ten years. The maximum
number of shares that can be issued under the plan is 724,239. The following table provides
certain information about the Companys equity compensation plan as of December 31, 2010:
 Number ofNumber of
    
    
    
    
    
    
    securities remainingsecurities to be
    
    
    
    
    
    
    available forissued upon
    
    
    
    
    
    
    future issuance underexercise of
    
    
    Weighted average
    
    
    equity compensationoutstanding
    
    
    exercise price of
    
    
    plans (excludingoptions, warrants
    
    
    options, warrants
    
    
    securities reflectedand rights
    
    
    and rights
    
    
    in column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved
by security holders
    
    
    122,133
    
    
    $
    21.50
    
    
    
    381,264Equity compensation plans not
approved by security holders
    
    
    
    
    
    
    
    
    
    
    
 The Company has granted incentive stock options to certain key officers and employees.
The Company has also granted nonqualified stock options to non-employee organizers of the
Bank. The stock option agreements state that upon termination of employment, employees have
90 days to exercise any stock options vested as of the termination date.
 The Company issues new shares to satisfy option exercises from the authorized shares
allocated to the employee stock option plan.
 A summary of activity in the Companys stock option plan for the year ended December 31,
2010 is as follows:
 Weighted AverageWeighted
    
    
    RemainingNumber
    
    
    Average
    
    
    Contractual Term
    
    
    Aggregateof Options
    
    
    Exercise Price
    
    
    (in years)
    
    
    Intrinsic ValueOptions outstanding, December 31, 2009
    
    
    125,086
    
    
    $
    21.44Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited
    
    
    (2,953
    )
    
    
    18.80Options outstanding, December 31, 2010
    
    
    122,133
    
    
    $
    21.50
    
    
    
    5.42
    
    
    $
    Fully vested and expected to vest
    
    
    122,133
    
    
    $
    21.50
    
    
    
    5.42
    
    
    $
    Exercisable at December 31, 2010
    
    
    66,867
    
    
    $
    19.06
    
    
    
    4.52
    
    
    $
    
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##### Table of Contents



Note 14  Stock Options (continued)
 Information related to the stock option plan during each year follows:
 2010
    
    
    2009Intrinsic value of options exercised
    
    $
    
    
    
    $
    Cash received from option exercises
    
    
    
    
    
    
    Tax benefit realized from option exercises
    
    
    
    
    
    
    70,696Weighted average fair value of options granted
    
    
    
    
    
    
    5.82
 As of December 31, 2010, there was $248,036 of total unrecognized compensation cost related
to non-vested share-based compensation arrangements granted under the stock option plan. The
cost is expected to be recognized over a weighted-average period of 2.04 years.
 The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model using the assumptions noted in the following table for
years in which options were granted. Expected volatilities are based on historical exercise
patterns, employee terminations and historical stock prices. The expected life of options
granted represents the period of time that options granted are expected to be outstanding.
The U.S. Treasury 10 year constant maturity rate in effect at the date of grant is used to
derive the risk-free interest rate for the contractual period of the options.
 2009Dividend yield
    
    
    0.00
    %Expected life
    
    9.5 yearsExpected volatility
    
    
    18
    %Risk-free interest rate
    
    
    2.96
    %
 Note 15  Regulatory Matters
 The Bank and Company are subject to various regulatory capital requirements administered by
the federal 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 financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action applicable to
the Bank, the Bank and Company must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings
and other factors.
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Note 15  Regulatory Matters (continued)
 Quantitative measures established by regulation to ensure capital adequacy require the Bank
and Company to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and
of Tier 1 capital (as defined) to average assets (as defined). In addition, the Companys
and the Banks regulators may impose additional capital requirements on financial
institutions and their bank subsidiaries, like the Company and the Bank, beyond those
provided for statutorily, which standards may be in addition to, and require higher levels
of capital, than the general capital adequacy guidelines. As discussed below, the Bank has
agreed to maintain certain of its capital ratios above statutory levels. As of December 31,
2010 and discussed below, the Bank failed to meet all capital adequacy requirements to which
it is subject.
 As of December 31, 2010, the most recent notification from the Office of the Comptroller of
the Currency (OCC) categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. However, as noted below, the Bank anticipates that it will be
required to enter into a Consent Order which will contain higher capital standards which
will result in it being deemed to be adequately capitalized for regulatory purposes.
  F-49




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Note 15  Regulatory Matters (continued)
 The actual capital amounts and ratios are presented in the table. Dollar amounts are
presented in thousands.
 Adequately Capitalized
    
    
    Well-Capitalized
    
    
    Required byActual
    
    
    Regulatory Minimum
    
    
    Regulatory Minimum
    
    
    IMCRAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of December 31, 2010:Total capital to risk-weighted assets:Consolidated
    
    $
    54,973
    
    
    
    13.27
    %
    
    $
    33,147
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    54,764
    
    
    
    13.23
    %
    
    
    33,110
    
    
    
    8.00
    %
    
    
    41,388
    
    
    
    10.00
    %
    
    
    53,804
    
    
    
    13.00
    %Tier I capital to risk-weighted assets:Consolidated
    
    
    49,174
    
    
    
    11.87
    %
    
    
    16,574
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    49,526
    
    
    
    11.97
    %
    
    
    16,555
    
    
    
    4.00
    %
    
    
    24,833
    
    
    
    6.00
    %
    
    
    N/A
    
    
    
    N/ATier I capital to average assets:Consolidated
    
    
    49,174
    
    
    
    8.34
    %
    
    
    23,585
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    49,526
    
    
    
    8.41
    %
    
    
    23,549
    
    
    
    4.00
    %
    
    
    29,436
    
    
    
    5.00
    %
    
    
    52,984
    
    
    
    9.00
    %As of December 31, 2009:Total capital to risk-weighted assets:Consolidated
    
    $
    65,993
    
    
    
    14.16
    %
    
    $
    37,290
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    65,287
    
    
    
    14.02
    %
    
    
    37,260
    
    
    
    8.00
    %
    
    
    46,574
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATier I capital to risk-weighted assets:Consolidated
    
    
    60,098
    
    
    
    12.89
    %
    
    
    18,645
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    59,397
    
    
    
    12.75
    %
    
    
    18,630
    
    
    
    4.00
    %
    
    
    27,945
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATier I capital to average assets:Consolidated
    
    
    60,098
    
    
    
    9.23
    %
    
    
    26,049
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    59,397
    
    
    
    9.14
    %
    
    
    26,007
    
    
    
    4.00
    %
    
    
    32,509
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 As a result of a regulatory examination conducted during the first quarter of 2009, the
Bank has entered into a formal written agreement in which it made certain commitments to the
OCC, including commitments to, among other things, implement a written program to reduce the
high level of credit risk in the Bank including strengthening credit underwriting and
problem loan workouts and collections, reduce its level of criticized assets, implement a
concentration risk management program related to commercial real estate lending, improve
procedures related to the maintenance of the Banks ALLL, strengthen the Banks internal
loan review program, strengthen the Banks loan workout department, and develop a liquidity
plan that improves the Banks reliance on wholesale funding sources. The Company has taken
action to comply with these requirements and does not believe compliance with these
commitments will have a materially adverse impact on its operations.
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Note 15  Regulatory Matters (continued)
 In February 2010, the Bank agreed to an OCC requirement to maintain a minimum Tier 1 capital
to average assets ratio of 9% and a minimum total capital to risk-weighted assets ratio of
13%. The OCC imposed this requirement to maintain capital at higher levels than those
required by applicable federal regulations because the OCC believed that the Banks capital
levels were less than satisfactory given the level of credit risk in the Bank, specifically
the high level of nonperforming assets and provision for loan losses. As noted above, the
Bank had 8.41% of Tier 1 capital to average assets and 13.25% of total capital to
risk-weighted assets ratio at December 31, 2010 and thus failed to satisfy its minimum Tier
1 capital to average assets ratio. Failure to satisfy such requirement could result in
further enforcement action by the OCC.
 In the fourth quarter of 2010, the OCC informed the Bank that, because the OCC does not
believe that the Bank has fully satisfied the requirements of the formal written agreement,
it will be requested to replace the formal written agreement with a consent order (the
Consent Order) containing commitments for further improvements in the Banks operations.
While the requirements of the Consent Order are not currently known to the Bank, the OCC has
informed the Banks management that the Consent Order will likely contain provisions similar
to those currently contained in the existing minimum capital commitment that the Bank made
to the OCC in connection with the Banks entering into the formal written agreement,
requiring the Bank to maintain a minimum Tier 1 leverage capital ratio of 9% and a minimum
total risk-based capital ratio of 13%. If the Bank fails to comply with the requirements of
the Consent Order, the OCC may impose additional limitations, restraints, commitments or
conditions on the Bank. Once the Consent Order is effective, the Bank will be deemed to be
adequately capitalized even if the Banks capital ratios exceed those minimum amounts
necessary to be considered well capitalized under federal banking regulations as well as
the minimum ratios set forth in the Consent Order.
 Since the Bank agreed to the capital requirement, certain actions have been taken, and are
ongoing, that are designed to ensure the required capital levels are maintained. The
reduction of total assets of the Bank can have a significant impact on the Tier 1 capital
ratio. Since December 31, 2009 the Bank has reduced total assets approximately $83,000,000
from approximately $640,000,000 to approximately $557,000,000 at December 31, 2010. This
reduction in assets was accomplished by reducing wholesale funding including brokered
deposits and Federal Home Loan Bank advances as well as the reduction of public funds
deposits. Additionally, loans outstanding and the bond investment portfolio were reduced
subsequent to the capital requirement. Expense reduction measures were put in place during
the second quarter of 2010 which included a significant reduction of salaries and benefits.
As a result of and the continuation of these efforts, management expects the Banks Tier 1
capital ratio will meet the minimum requirement as of March 31, 2011.
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Note 15  Regulatory Matters (continued)
 Dividend restrictions:
 The Companys principal source of funds for dividend payments is dividends received from the
Bank. The Bank is subject to limitations on the payment of dividends to the Company under
federal banking laws and the regulations of the OCC. The Company is also subject to limits
on payment of dividends to its shareholders by the rules, regulations and policies of
federal banking authorities. Under these regulations, the amount of dividends that may be
paid in any calendar year is limited to the current years net profits, combined with the
retained net profits of the preceding two years, subject to the capital requirements
described above.
 As of December 31, 2010, pursuant to federal banking regulations and due to losses incurred
during 2009 and 2010, the Company and Bank may not, without the prior approval of their
respective banking authorities, pay any dividends until such time that current year profits
exceed the net losses and dividends of the prior two years. Generally, federal regulatory
policy discourages payment of holding company or bank dividends if the holding company or
its subsidiaries are experiencing losses.
 Supervisory guidance from the Federal Reserve Board indicates that bank holding companies
that are experiencing financial difficulties generally should eliminate, reduce or defer
dividends on Tier 1 capital instruments including trust preferred securities, preferred
stock or common stock, if the holding company needs to conserve capital for safe and sound
operation and to serve as a source of strength to its subsidiaries. The Company has
informally committed to the Federal Reserve Board that it will not (1) declare or pay
dividends on the Companys common or preferred stock, or (2) incur any additional
indebtedness without in each case, the prior written approval of the Federal Reserve Board.
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Note 16  Other Comprehensive Income (Loss)
 Other comprehensive income (loss) consists of unrealized holding gains and losses on
securities available for sale. A summary of other comprehensive income (loss) and the
related tax effects for the years ended December 31, 2010 and 2009 is as follows:
 TaxBefore-Tax
    
    
    (Expense)
    
    
    Net-of-TaxAmount
    
    
    Benefit
    
    
    AmountYear ended December 31, 2010:Unrealized holding gains/(losses)
arising during the period
    
    $
    163,313
    
    
    $
    (574,182
    )
    
    $
    (410,869
    )Less reclassification adjustment for
gains realized in net income (loss)
    
    
    (1,511,005
    )
    
    
    574,182
    
    
    
    (936,823
    )$
    (1,347,692
    )
    
    $
    
    
    
    $
    (1,347,692
    )Year ended December 31, 2009:Unrealized holding gains/(losses)
arising during the period
    
    $
    2,919,308
    
    
    $
    (1,117,736
    )
    
    $
    1,801,572Less reclassification adjustment for
gains realized in net income (loss)
    
    
    (2,211,243
    )
    
    
    840,272
    
    
    
    (1,370,971
    )$
    708,065
    
    
    $
    (277,464
    )
    
    $
    430,601
 Note 17  Earnings (Loss) Per Common Share
 Basic earnings (loss) per share represents income (loss) available to common stockholders
divided by the weighted-average number of common shares outstanding during the period.
Diluted earnings (loss) per share reflects additional common shares that would have been
outstanding if dilutive potential common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income (loss) that
would result from the assumed issuance.
 Potential common shares that may be issued by the Company relate to outstanding stock
options, determined using the treasury stock method.
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Note 17  Earnings (Loss) Per Common Share (continued)
 Earnings (loss) per common share have been computed based on the following:
 2010
    
    
    2009Net income (loss)
    
    $
    (10,451,178
    )
    
    $
    (4,228,395
    )Average number of common shares outstanding
    
    
    2,631,611
    
    
    
    2,631,611Dilutive effect of stock options
    
    
    
    
    
    
    Average number of common shares outstanding used
to calculate diluted earnings (loss) per common share
    
    
    2,631,611
    
    
    
    2,631,611
 At December 31, 2010 and 2009, there were options for the purchase of 122,133 and 125,086
shares, respectively, outstanding that were antidilutive.
 Potential common shares that would have the effect of decreasing diluted loss per share are
considered to be antidilutive and therefore not included in calculating diluted loss per
share. During the year ended December 31, 2009, due to the net loss, there were 19,315
shares excluded from this calculation although the exercise price for such shares
underlying options was less than the fair value of the Companys common stock. For the year
ended December 31, 2010, the exercise price of all outstanding options was greater than the
fair value of the Companys stock.
 Note 18  Recent Accounting Pronouncements
 FASB ASC 810 Consolidation(ASC 810) was amended to change how a company determines when
an entity that is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is required to
consolidate an entity is based on, among other things, an entitys purpose and design and a
companys ability to direct the activities of the entity that most significantly impact the
entitys economic performance. The new authoritative accounting guidance requires additional
disclosures about the reporting entitys involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its affect on the
entitys financial statements. The new authoritative accounting guidance under ASC 810 was
effective January 1, 2010 and did not have a significant impact on our financial statements.
 FASB ASC 860 Transfers and Servicing(ASC 860) was amended to enhance reporting about
transfers of financial assets, including securitizations, and where companies have
continuing exposure to the risks related to transferred financial assets. The new
authoritative accounting guidance eliminates the concept of a qualifying special-purpose
entity and changes the requirements for derecognizing financial assets. The new
authoritative accounting guidance also requires additional disclosures about all continuing
involvements with transferred financial assets including information about gains and losses
resulting from transfers during the period. The new authoritative accounting guidance under
ASC 860 was effective January 1, 2010 and did not have a significant impact on our financial
statements.
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Note 18  Recent Accounting Pronouncements (continued)
 FASB ASC 310 Receivables, Sub-Topic 310-30 Loans and Debt Securities Acquired with
Deteriorated Credit Quality(Subtopic 310-30) was amended to clarify that modifications of
loans that are accounted for within a pool under Subtopic 310-30 do not result in the
removal of those loans from the pool even if the modification would otherwise be considered
a troubled debt restructuring. The amendments do not affect the accounting for loans under
the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for
individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring
accounting provisions within ASC 310 Subtopic 310-40 Troubled Debt Restructurings by
Creditors. The new authoritative accounting guidance under Subtopic 310-30 was effective in
the third quarter of 2010. This amendment did not have a significant impact on our financial
statements.
 FASB ASC 310 Receivables(ASC 310) was amended to enhance disclosures about credit quality
of financing receivables and the allowance for credit losses. The amendments require an
entity to disclose credit quality information, such as internal risk gradings, more detailed
nonaccrual and past due information, and modifications of its financing receivables. The
disclosures under ASC 310, as amended, were effective for interim and annual reporting
periods ending on or after December 15, 2010. We do not expect this amendment to have a
significant impact on our financial results, but it will significantly expand the
disclosures that we are required to provide, some of which are included in this annual
filing, as required, with additional disclosures included in future filings.
 FASB ASU No. 2010-06 Improving Disclosures About Fair Value Measurements(ASU 2010-06)
amended guidance for fair value measurements and disclosures to clarify and provide
additional disclosure requirements related to recurring and non-recurring fair value
measurements. The update requires new disclosures for transfers in and out of Levels 1 and
2, and requires a reconciliation to be provided for the activity in Level 3 fair value
measurements. A reporting entity should disclose separately the amounts of significant
transfers in and out of Levels 1 and 2 and provide an explanation for the transfers. This
guidance was effective for interim periods beginning after December 15, 2009, and did not
have a material effect on the Companys results of operations or financial position.
 In the reconciliation for fair value measurements using observable inputs (Level 3) a
reporting entity should present separately information about purchases, sales, issuances,
and settlements on a gross basis rather than a net basis. Disclosures relating to purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurement will become effective beginning after December 15, 2010, and for interim periods
within those fiscal years. The adoption of this standard is not expected to have a material
effect on the Companys results of operations or financial position.
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Note 19  Condensed Parent Information
 BALANCE SHEETS
 December 31,2010
    
    
    2009ASSETSCash
    
    $
    52,648
    
    
    $
    114,454Investment in subsidiary
    
    
    48,461,350
    
    
    
    59,679,774Other assets
    
    
    655,999
    
    
    
    1,015,161Total assets
    
    $
    49,169,997
    
    
    $
    60,809,389LIABILITIES AND SHAREHOLDERS EQUITYSubordinated debentures
    
    $
    13,403,000
    
    
    $
    13,403,000Accrued interest payable
    
    
    92,827
    
    
    
    37,234Total liabilities
    
    
    13,495,827
    
    
    
    13,440,234Shareholders equity
    
    
    35,674,170
    
    
    
    47,369,155Total liabilities and shareholders equity
    
    $
    49,169,997
    
    
    $
    60,809,389
 STATEMENTS OF INCOME (LOSS)
 Year Ended December 31,2010
    
    
    2009Interest expense
    
    $
    343,850
    
    
    $
    392,016Other expense
    
    
    40,295
    
    
    
    44,114Loss before equity in undistributed earnings (loss) of subsidiary
    
    
    (384,145
    )
    
    
    (436,130
    )Equity in undistributed earnings (loss) of subsidiary
    
    
    (9,974,617
    )
    
    
    (3,959,259
    )Income tax expense (benefit)
    
    
    92,416
    
    
    
    (166,994
    )Net loss
    
    $
    (10,451,178
    )
    
    $
    (4,228,395
    )
  F-56




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##### Table of Contents



Note 19  Condensed Parent Information (continued)
 STATEMENTS OF CASH FLOWS
 Year Ended December 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (10,451,178
    )
    
    $
    (4,228,395
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activitiesEquity in undistributed (income) loss of subsidiary
    
    
    9,974,617
    
    
    
    3,959,259Other
    
    
    414,755
    
    
    
    (80,294
    )Net cash used in operating activities
    
    
    (61,806
    )
    
    
    (349,430
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (61,806
    )
    
    
    (349,430
    )CASH AND CASH EQUIVALENTS, beginning of year
    
    
    114,454
    
    
    
    463,884CASH AND CASH EQUIVALENTS, end of year
    
    $
    52,648
    
    
    $
    114,454SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid (received) during the year for:Interest
    
    $
    288,258
    
    
    $
    481,613Income taxes
    
    
    (266,746
    )
    
    
    (154,676
    )
  F-57