##### Table of Contents



UNITED
STATESSECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-KSB
 (Mark One)
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-49912
 MOUNTAIN NATIONAL BANCSHARES, INC.
  Tennessee
    
    75-3036312(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer Identification No.)300 East Main, Sevierville, Tennessee
    
    37862(Address of principal executive offices)
    
    (Zip code)
 (865) 428-7990
    þ
 Yes þ No o
 o
 Yes o No þ
    DOCUMENTS INCORPORATED BY REFERENCE
  o þ




---



##### Table of Contents



MOUNTAIN NATIONAL BANCSHARES, INC.
Annual Report on Form 10-KSB
For the Fiscal Year Ended December 31, 2006
 Table of Contents
 Item
    
    
    
    PageNumber
    
    
    
    NumberPart I1.
    
    Description of Business
    
    
    12.
    
    Description of Property
    
    
    193.
    
    Legal Proceedings
    
    
    204.
    
    Submission of Matters to a Vote of
Security Holders
    
    
    20Part II5.
    
    Market for Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities
    
    
    206.
    
    Managements Discussion and Analysis
or Plan of Operation
    
    
    227.
    
    Financial Statements
    
    
    488.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    498A.
    
    Controls and Procedures
    
    
    508B.
    
    Other Information
    
    
    50Part III9.
    
    Directors, Executive Officers, Promoters, Control Persons and
Corporate Governance; Compliance with Section 16(a) of the
Exchange Act
    
    
    5010.
    
    Executive Compensation
    
    
    50




---



##### Table of Contents



Item
    
    
    
    PageNumber
    
    
    
    Number11.
    
    Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    5112.
    
    Certain Relationships and Related Transactions, and
Director Independence
    
    
    5113.
    
    Exhibits
    
    
    5114.
    
    Principal Accountant Fees and Services
    
    
    53Signatures
    
    
    54EX-21 SUSIDIARIES OF THE COMPANYEx-23.1 Accountants' ConsentEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




---



##### Table of Contents



PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS
 Forward-Looking Statements
    
    
    the effects of future economic or business conditions;
    
    governmental 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;
    
    credit risks of borrowers;
    
    the effects of competition from a wide variety of local, regional, national and
other providers of financial, investment and insurance services;
    
    the failure of assumptions underlying the establishment of reserves for possible
loan losses and other estimates;
    
    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;
    
    changes in accounting policies, rules and practices;
 1




---



##### Table of Contents




    
    changes in technology or products that may be more difficult, or costly, or less
effective, than anticipated;
    
    the effects of war or other conflict, acts of terrorism or other catastrophic
events that may affect general economic conditions; and
    
    other factors and risks described in any of our subsequent reports that we make
with the Securities and Exchange Commission (the Commission) under the Exchange
Act.
  The Company
     The Bank
  2




---



##### Table of Contents



Our Banking Business
 General .
   Market Areas .
 3




---



##### Table of Contents



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;
    
    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.
  Construction Lending
  4




---



##### Table of Contents



Commercial Lending
  5




---



##### Table of Contents



Creditworthiness and Collateral
 Loan Originations
 Secondary Market Activities
   Income from Lending Activities
 Loan Delinquencies and Defaults
 6




---



##### Table of Contents



Investment Activities
  Sources of Funds
 General
 Deposits
 Borrowings
 7




---



##### Table of Contents



Financing
   Competition
   8




---



##### Table of Contents



Employees
  Seasonality
  9




---



##### Table of Contents



Supervision and Regulation
 Supervision and Regulation
  Bank Holding Company Regulation
    10




---



##### Table of Contents



De novo
  11




---



##### Table of Contents



Bank Regulation
     12




---



##### Table of Contents



Community Reinvestment Act
    13




---



##### Table of Contents



Sarbanes-Oxley Act
  Payments of Dividends
   Capital
  14




---



##### Table of Contents



15




---



##### Table of Contents



Regulatory Minimum to beAdequately Capitalized
    
    Company
    
    BankTier 1 capital ratio
    
    
    4.0
    %
    
    
    11.77
    %
    
    
    11.33
    %Total capital ratio
    
    
    8.0
    %
    
    
    12.98
    %
    
    
    12.22
    %Leverage ratio
    
    
    3.0-5.0
    %
    
    
    10.37
    %
    
    
    9.99
    %
 FDICIA
    Enforcement Policies and Actions
  16




---



##### Table of Contents



Fiscal and Monetary Policy
  FDIC Insurance Assessments
    17




---



##### Table of Contents



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.
  
    
    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.
  18




---



##### Table of Contents



Legislative and Regulatory Changes
 de novo .
 Statistical Information
  
 ITEM 2. DESCRIPTION OF PROPERTY
        19




---



##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR THE COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES
  20




---



##### Table of Contents



Estimated Price RangePer ShareHigh
    
    Low2006:First Quarter
    
    $
    25.85
    
    
    $
    24.72Second Quarter
    
    
    28.57
    
    
    
    25.85Third Quarter
    
    
    28.19
    
    
    
    26.29Fourth Quarter
    
    
    27.38
    
    
    
    26.192005:First Quarter
    
    $
    21.77
    
    
    $
    19.05Second Quarter
    
    
    21.77
    
    
    
    19.73Third Quarter
    
    
    26.98
    
    
    
    20.41Fourth Quarter
    
    
    26.53
    
    
    
    23.85
      21




---



##### Table of Contents



Issuer Purchases of Equity Securities
  
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  Overview
    22




---



##### Table of Contents



12/31/06
    
    12/31/05
    
    $ change
    
    % changeNet income
    
    $
    3,897,373
    
    
    $
    3,123,502
    
    
    $
    773,871
    
    
    
    24.78
    %Basic earnings per
share
    
    
    2.03
    
    
    
    1.90
    
    
    
    
    
    
    
    Diluted earnings per
share
    
    
    1.88
    
    
    
    1.73
    
    
    
    
    
    
    
    Total assets
    
    
    469,982,016
    
    
    
    352,648,901
    
    
    
    117,333,115
    
    
    
    33.27
    %Total liabilities
    
    
    435,571,153
    
    
    
    323,015,894
    
    
    
    112,555,259
    
    
    
    34.85
    %Shareholders equity
    
    
    34,410,863
    
    
    
    29,633,008
    
    
    
    4,777,855
    
    
    
    16.12
    %
 Critical Accounting Policies
   Impairment of Investment Securities
  23




---



##### Table of Contents



Allowance and Provision for Loan Losses
  Results of Operations for the Years Ended December 31, 2006 and 2005
 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
 24




---



##### Table of Contents




    
    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.
  Net Income
  2006
    
    2005
    
    $ change
    
    % changeNet income
    
    $
    3,897,373
    
    
    $
    3,123,502
    
    
    $
    773,871
    
    
    
    24.78
    %
   2006
    
    2005
    
    $ change
    
    % changeTotal revenues
    
    $
    32,247,244
    
    
    $
    21,906,050
    
    
    $
    10,341,194
    
    
    
    47.21
    %Total expenses
    
    
    27,054,534
    
    
    
    17,328,967
    
    
    
    9,725,567
    
    
    
    56.12
    %
  25




---



##### Table of Contents



2006
    
    
    2005First Quarter
    
    $
    935,453
    
    
    $
    640,171Second Quarter
    
    
    1,046,081
    
    
    
    720,863Third Quarter
    
    
    951,271
    
    
    
    862,185Fourth Quarter
    
    
    964,568
    
    
    
    900,283Annual Total
    
    $
    3,897,373
    
    
    $
    3,123,502
  %2006
    
    
    2005
    
    
    CHANGE(in thousands)Net Interest Income*
    
    $
    15,884
    
    
    $
    12,474
    
    
    
    27.33
    %Provision for Loan Losses
    
    
    915
    
    
    
    446
    
    
    
    105.16
    %Non-Interest Income
    
    
    3,246
    
    
    
    2,682
    
    
    
    21.05
    %Operating Expenses
    
    
    13,022
    
    
    
    10,133
    
    
    
    28.51
    %Net income before
Income tax provision
    
    $
    5,193
    
    
    $
    4,577
    
    
    
    13.45
    %
 
 *
    
    Net interest income is the difference between the interest income received on the Banks
earning assets and the interest expense paid on its deposits and borrowings.  26




---



##### Table of Contents



Net Interest Income
 Average Balances, Interest Income, and Interest Expense
  Average Balance Sheet and Analysis of Net Interest Income
for the Years Ended December 31,
(Dollars in thousands)
 2006
    
    2005
    
    2004Average
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate(Dollars in thousands)Assets:Investment securities (1):Available for sale
    
    $
    73,503
    
    
    
    3,416
    
    
    
    4.65
    %
    
    $
    57,103
    
    
    
    2,450
    
    
    
    4.29
    %
    
    $
    37,431
    
    
    
    1,652
    
    
    
    4.41
    %Held to maturity
    
    
    1,444
    
    
    
    68
    
    
    
    4.71
    %
    
    
    1,093
    
    
    
    54
    
    
    
    4.94
    %
    
    
    375
    
    
    
    21
    
    
    
    5.60
    %Unrealized gains on available for
sale securities
    
    
    (1,814
    )
    
    
    
    
    
    
    
    
    
    
    (765
    )
    
    
    
    
    
    
    
    
    
    
    (299
    )
    
    
    
    
    
    
    Federal funds sold
    
    
    4,581
    
    
    
    230
    
    
    
    5.02
    %
    
    
    4,789
    
    
    
    175
    
    
    
    3.65
    %
    
    
    1,634
    
    
    
    27
    
    
    
    1.65
    %Loans (2)(3)
    
    
    292,950
    
    
    
    25,287
    
    
    
    8.63
    %
    
    
    227,874
    
    
    
    16,545
    
    
    
    7.26
    %
    
    
    188,481
    
    
    
    11,618
    
    
    
    6.16
    %Allowance for loan losses
    
    
    (2,958
    )
    
    
    
    
    
    
    
    
    
    
    (2,459
    )
    
    
    
    
    
    
    
    
    
    
    (2,137
    )
    
    
    
    
    
    
    Cash and due from banks
    
    
    8,431
    
    
    
    
    
    
    
    
    
    
    
    10,072
    
    
    
    
    
    
    
    
    
    
    
    6,972
    
    
    
    
    
    
    
    Other assets
    
    
    32,079
    
    
    
    
    
    
    
    
    
    
    
    22,168
    
    
    
    
    
    
    
    
    
    
    
    19,759
    
    
    
    
    
    
    
    Total
    
    
    408,216
    
    
    
    
    
    
    
    
    
    
    
    319,875
    
    
    
    
    
    
    
    
    
    
    
    252,216
    
    
    
    
    
    
    
    Total interest-earning assets
    
    
    372,465
    
    
    
    29,001
    
    
    
    7.79
    %
    
    
    290,859
    
    
    
    19,224
    
    
    
    6.61
    %
    
    
    227,921
    
    
    
    13,318
    
    
    
    5.84
    %Liabilities:Noninterest-bearing demand
deposits
    
    
    54,163
    
    
    
    
    
    
    
    
    
    
    
    46,187
    
    
    
    
    
    
    
    
    
    
    
    35,816
    
    
    
    
    
    
    
    Interest bearing demand deposits
    
    
    120,268
    
    
    
    4,477
    
    
    
    3.72
    %
    
    
    98,356
    
    
    
    2,141
    
    
    
    2.18
    %
    
    
    79,254
    
    
    
    1,056
    
    
    
    1.33
    %Savings deposits
    
    
    7,860
    
    
    
    48
    
    
    
    0.61
    %
    
    
    6,764
    
    
    
    40
    
    
    
    0.59
    %
    
    
    6,112
    
    
    
    36
    
    
    
    0.59
    %Time deposits
    
    
    146,013
    
    
    
    6,248
    
    
    
    4.28
    %
    
    
    117,416
    
    
    
    3,504
    
    
    
    2.98
    %
    
    
    99,664
    
    
    
    2,109
    
    
    
    2.12
    %Total deposits
    
    
    328,304
    
    
    
    
    
    
    
    
    
    
    
    268,723
    
    
    
    
    
    
    
    
    
    
    
    220,846
    
    
    
    
    
    
    
    Subordinated debentures & other
borrowings
    
    
    46,676
    
    
    
    2,344
    
    
    
    5.02
    %
    
    
    28,186
    
    
    
    1,064
    
    
    
    3.77
    %
    
    
    15,671
    
    
    
    433
    
    
    
    2.76
    %Other liabilities
    
    
    2,109
    
    
    
    
    
    
    
    
    
    
    
    1,739
    
    
    
    
    
    
    
    
    
    
    
    901
    
    
    
    
    
    
    
    Shareholders equity
    
    
    31,127
    
    
    
    
    
    
    
    
    
    
    
    21,227
    
    
    
    
    
    
    
    
    
    
    
    14,798
    
    
    
    
    
    
    
    Total
    
    
    408,216
    
    
    
    
    
    
    
    
    
    
    
    319,875
    
    
    
    
    
    
    
    
    
    
    
    252,216
    
    
    
    
    
    
    
    Total interest-bearing liabilities
    
    
    320,817
    
    
    
    13,117
    
    
    
    4.09
    %
    
    
    250,722
    
    
    
    6,749
    
    
    
    2.69
    %
    
    
    200,701
    
    
    
    3,634
    
    
    
    1.81
    %Net interest income
    
    
    
    
    
    
    15,884
    
    
    
    
    
    
    
    
    
    
    
    12,475
    
    
    
    
    
    
    
    
    
    
    
    9,684
    
    
    
    Net interest spread (4)
    
    
    
    
    
    
    
    
    
    
    3.70
    %
    
    
    
    
    
    
    
    
    
    
    3.92
    %
    
    
    
    
    
    
    
    
    
    
    4.03
    %Net interest margin (5)
    
    
    
    
    
    
    
    
    
    
    4.26
    %
    
    
    
    
    
    
    
    
    
    
    4.29
    %
    
    
    
    
    
    
    
    
    
    
    4.25
    %
 
 (1)
    
    Tax-exempt income from investment securities is not presented on a tax-equivalent basis.(2)
    
    Interest income from loans includes total fee income of approximately $2,091,000, $1,673,000
and $1,169,000 for the years ended December 31, 2006, 2005, and 2004, respectively.(3)
    
    For the purpose of these computations, non-accrual loans are included in average loans.(4)
    
    Interest rate spread is the weighted average yield on interest-earning assets minus the
average rate on interest-bearing liabilities.(5)
    
    Net interest margin is net interest income divided by average interest-earning assets.  2006
    
    2005
    
    $ change
    
    % changeNet interest income
    
    $
    15,883,702
    
    
    $
    12,474,554
    
    
    $
    3,409,148
    
    
    
    27.33
    %
  27




---



##### Table of Contents



2006
    
    2005
    
    $ change
    
    % changeInterest income on
investment securities
    
    $
    3,477,158
    
    
    $
    2,504,415
    
    
    $
    972,743
    
    
    
    38.84
    %
  Rate and Volume Analysis
  28




---



##### Table of Contents



ANALYSIS OF CHANGES IN NET INTEREST INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
 2006 Compared to 2005Increase (decrease)due to change inRate
    
    
    Volume
    
    
    TotalIncome from interest-earning assets:Interest and fees on loans
    
    $
    4,017
    
    
    $
    4,725
    
    
    $
    8,742Interest on securities
    
    
    258
    
    
    
    722
    
    
    
    980Interest on Federal funds sold
    
    
    63
    
    
    
    (8
    )
    
    
    55Total interest income
    
    $
    4,338
    
    
    $
    5,439
    
    
    $
    9,777Expense from interest-bearing liabilities:Interest on interest-bearing deposits
    
    $
    1,868
    
    
    $
    476
    
    
    $
    2,344Interest on time deposits
    
    
    1,892
    
    
    
    852
    
    
    
    2,744Interest on other borrowings
    
    
    583
    
    
    
    697
    
    
    
    1,280Total interest expense
    
    $
    4,343
    
    
    $
    2,025
    
    
    $
    6,368Net interest income
    
    $
    (5
    )
    
    $
    3,414
    
    
    $
    3,409
 2005 Compared to 2004Increase (decrease)due to change inRate
    
    
    Volume
    
    
    TotalIncome from interest-earning assets:Interest and fees on loans
    
    $
    2,507
    
    
    $
    2,420
    
    
    $
    4,927Interest on securities
    
    
    (70
    )
    
    
    901
    
    
    
    831Interest on Federal funds sold
    
    
    92
    
    
    
    55
    
    
    
    147Total interest income
    
    $
    2,529
    
    
    $
    3,376
    
    
    $
    5,905Expense from interest-bearing liabilities:Interest on interest-bearing deposits
    
    $
    830
    
    
    $
    259
    
    
    $
    1,089Interest on time deposits
    
    
    1,010
    
    
    
    385
    
    
    
    1,395Interest on other borrowings
    
    
    285
    
    
    
    346
    
    
    
    631Total interest expense
    
    $
    2,125
    
    
    $
    990
    
    
    $
    3,115Net interest income
    
    $
    404
    
    
    $
    2,386
    
    
    $
    2,790
 Provision for Loan Losses
  29




---



##### Table of Contents



2006
    
    2005
    
    $ change
    
    % changeProvision for loan
losses
    
    $
    915,000
    
    
    $
    446,000
    
    
    $
    469,000
    
    
    
    105.16
    %
   Noninterest Income
  2006
    
    2005
    
    $ change
    
    % changeNoninterest income
    
    $
    3,246,399
    
    
    $
    2,681,961
    
    
    $
    564,438
    
    
    
    21.05
    %
  Interest Expense and Net Interest Margin
  2006
    
    2005
    
    $ change
    
    % changeInterest expense
    
    $
    13,117,143
    
    
    $
    6,749,535
    
    
    $
    6,367,608
    
    
    
    94.34
    %
  30




---



##### Table of Contents



2006
    
    2005
    
    $ change
    
    % changeInterest on deposits
    
    $
    10,773,481
    
    
    $
    5,685,712
    
    
    $
    5,087,769
    
    
    
    89.48
    %
   2006
    
    2005
    
    $ change
    
    % changeInterest on other
borrowings
    
    $
    2,343,662
    
    
    $
    1,063,823
    
    
    $
    1,279,839
    
    
    
    120.31
    %
   31




---



##### Table of Contents



Other Expenses
  2006
    
    2005
    
    $ change
    
    % changeNon-interest expense
    
    $
    13,022,391
    
    
    $
    10,133,432
    
    
    $
    2,888,959
    
    
    
    28.51
    %
  Income Taxes
  2006
    
    2005
    
    $ change
    
    % changeIncome tax expense
    
    $
    1,295,337
    
    
    $
    1,453,581
    
    
    
    ($158,244
    )
    
    
    (10.89
    %)
  Discussion of Financial Condition
 General Discussion of Our Financial Condition
  2006
    
    2005
    
    $ change
    
    % changeTotal average assets
    
    $
    408,215,671
    
    
    $
    319,874,919
    
    
    $
    88,340,752
    
    
    
    27.62
    %Average interest-
earning assets
    
    $
    372,465,000
    
    
    $
    290,859,000
    
    
    $
    81,606,000
    
    
    
    28.06
    %Other average assets
    
    $
    32,079,000
    
    
    $
    22,168,000
    
    
    $
    9,911,000
    
    
    
    44.71
    %
 32




---



##### Table of Contents



2006
    
    2005
    
    $ change
    
    % changeTotal average
liabilties
    
    $
    379,904,541
    
    
    $
    299,865,936
    
    
    $
    80,038,605
    
    
    
    26.69
    %
  2006
    
    2005
    
    $ change
    
    % changeTotal average
deposits
    
    $
    328,304,320
    
    
    $
    268,722,774
    
    
    $
    59,581,546
    
    
    
    22.17
    %Average non-
interest-bearing
demand deposits
    
    $
    54,162,667
    
    
    $
    46,187,139
    
    
    $
    7,975,528
    
    
    
    17.27
    %Average interest-
bearing demand &
savings deposits
    
    $
    128,128,170
    
    
    $
    105,120,140
    
    
    $
    23,008,030
    
    
    
    21.89
    %Average time
deposits
    
    $
    146,013,483
    
    
    $
    117,415,495
    
    
    $
    28,597,988
    
    
    
    24.36
    %
  2006
    
    2005
    
    $ change
    
    % changeShareholders equity
    
    $
    34,410,863
    
    
    $
    29,633,008
    
    
    $
    4,777,855
    
    
    
    16.12
    %
  2006
    
    2005
    
    $ change
    
    % changeOther comprehensive
loss
    
    
    ($697,737
    )
    
    
    ($842,611
    )
    
    
    ($144,874
    )
    
    
    (17.19
    %)
 33




---



##### Table of Contents



Loans
  2006
    
    2005
    
    $ change
    
    % changeLoans
    
    $
    344,708,815
    
    
    $
    248,864,088
    
    
    $
    95,844,727
    
    
    
    38.51
    %
  Loan Portfolio
 At December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(In Thousands)Commercial, financial, agricultural
    
    $
    26,062
    
    
    $
    15,375
    
    
    $
    9,870
    
    
    $
    10,489
    
    
    $
    7,542Real estate  construction, development
    
    
    137,989
    
    
    
    80,719
    
    
    
    55,618
    
    
    
    44,086
    
    
    
    39,183Real estate  mortgage
    
    
    173,085
    
    
    
    144,898
    
    
    
    134,272
    
    
    
    119,821
    
    
    
    93,654Consumer and other
    
    
    7,572
    
    
    
    7,872
    
    
    
    9,418
    
    
    
    5,449
    
    
    
    5,989Less allowance for loan losses
    
    
    3,524
    
    
    
    2,634
    
    
    
    2,281
    
    
    
    2,142
    
    
    
    1,595Loans, net
    
    $
    341,184
    
    
    $
    246,230
    
    
    $
    206,897
    
    
    $
    177,703
    
    
    $
    144,773
  34




---



##### Table of Contents



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(Dollars in Thousands)Commercial, financial, agricultural
    
    $
    22,217
    
    
    $
    2,599
    
    
    $
    1,234
    
    
    $
    12Real estate  construction, development
    
    
    114,033
    
    
    
    15,342
    
    
    
    5,851
    
    
    
    2,763Real estate  mortgage
    
    
    101,451
    
    
    
    44,826
    
    
    
    15,863
    
    
    
    10,945Consumer and other
    
    
    4,646
    
    
    
    1,674
    
    
    
    1,030
    
    
    
    222Total
    
    $
    242,347
    
    
    $
    64,441
    
    
    $
    23,978
    
    
    $
    13,942
  Allowance for Loan Losses
    35




---



##### Table of Contents



36




---



##### Table of Contents



At December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(Dollars in Thousands)Loans accounted for on a nonaccrual basis
    
    $
    
    
    
    $
    92
    
    
    $
    161
    
    
    $
    289
    
    
    $
    159Loans contractually past due ninety days or more as
to interest or principal payments and still accruing
    
    
    470
    
    
    
    342
    
    
    
    21
    
    
    
    1,460
    
    
    
    46Loans, the terms of which have been renegotiated to
provide a reduction or deferral of interest or
principal because of deterioration in the financial
position of the borrower
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loans now current about which there are serious
doubts as to the ability of the borrower to comply
with present loan repayment terms
    
    
    30
    
    
    
    95
    
    
    
    15
    
    
    
    182
    
    
    
    2,424
  Interest income that would have been recorded on
nonaccrual loans under original terms
    
    $
    458Interest income that was recorded
on nonaccrual loans
    
    $
    458
    37




---



##### Table of Contents



December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(Dollars in Thousands)Average balance of loans outstanding
    
    $
    292,937
    
    
    $
    227,874
    
    
    $
    188,481
    
    
    $
    162,133
    
    
    $
    122,177Balance of allowance for loan losses at beginning of year
    
    
    2,634
    
    
    
    2,281
    
    
    
    2,142
    
    
    
    1,595
    
    
    
    847Charge-offs:Commercial, financial, agricultural
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    Real estate  construction, development
    
    
    1
    
    
    
    24
    
    
    
    
    
    
    
    3
    
    
    
    Real estate  mortgage
    
    
    25
    
    
    
    40
    
    
    
    325
    
    
    
    7
    
    
    
    27Consumer and other
    
    
    23
    
    
    
    45
    
    
    
    42
    
    
    
    187
    
    
    
    19Recoveries:Commercial, financial, agricultural
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    Real estate  construction, development
    
    
    1
    
    
    
    
    
    
    
    17
    
    
    
    4
    
    
    
    Real estate  mortgage
    
    
    18
    
    
    
    10
    
    
    
    21
    
    
    
    
    
    
    
    Consumer and other
    
    
    5
    
    
    
    6
    
    
    
    
    
    
    
    5
    
    
    
    14Net charge-offs
    
    
    25
    
    
    
    93
    
    
    
    329
    
    
    
    188
    
    
    
    32Additions to allowance charged to operations
    
    
    915
    
    
    
    446
    
    
    
    468
    
    
    
    735
    
    
    
    780Balance of allowance for loan losses at end of year
    
    
    3,524
    
    
    
    2,634
    
    
    
    2,281
    
    
    
    2,142
    
    
    
    1,595Ratio of net loan charge-offs during the year to
average loans outstanding during the year
    
    
    0.01
    %
    
    
    0.04
    %
    
    
    0.17
    %
    
    
    0.12
    %
    
    
    0.03
    %
  December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in each
    
    
    
    
    
    
    Loans in each
    
    
    
    
    
    
    Loans in each
    
    
    
    
    
    
    Loans in each
    
    
    
    
    
    
    Loans in eachCategory To
    
    
    
    
    
    
    Category To
    
    
    
    
    
    
    Category To
    
    
    
    
    
    
    Category To
    
    
    
    
    
    
    Category ToAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans(Dollars in Thousands)Commercial
    
    $
    418
    
    
    
    7.56
    %
    
    $
    225
    
    
    
    3.16
    %
    
    $
    226
    
    
    
    4.72
    %
    
    $
    261
    
    
    
    5.83
    %
    
    $
    171
    
    
    
    5.15
    %Real estate  construction
    
    $
    1,331
    
    
    
    40.03
    %
    
    $
    837
    
    
    
    32.43
    %
    
    $
    584
    
    
    
    26.59
    %
    
    $
    495
    
    
    
    24.51
    %
    
    $
    480
    
    
    
    31.66
    %Real estate  mortgage
    
    
    1,669
    
    
    
    50.21
    %
    
    
    1,502
    
    
    
    58.23
    %
    
    
    1,411
    
    
    
    64.19
    %
    
    
    1,347
    
    
    
    66.63
    %
    
    
    895
    
    
    
    59.10
    %Consumer, other
    
    
    106
    
    
    
    2.20
    %
    
    
    70
    
    
    
    6.18
    %
    
    
    60
    
    
    
    4.50
    %
    
    
    39
    
    
    
    3.03
    %
    
    
    49
    
    
    
    4.09
    %Total
    
    $
    3,524
    
    
    
    100.00
    %
    
    $
    2,634
    
    
    
    100.00
    %
    
    $
    2,281
    
    
    
    100.00
    %
    
    $
    2,142
    
    
    
    100.00
    %
    
    $
    1,595
    
    
    
    100.00
    %
 Securities
  2006
    
    2005
    
    $ change
    
    % changeSecurities
    
    $
    75,993,695
    
    
    $
    58,427,583
    
    
    $
    17,566,112
    
    
    
    30.06
    %
 38




---



##### Table of Contents



December 31,2006
    
    
    2005
    
    
    2004(Dollars in Thousands)Securities available for sale:U.S. Treasury and government
agencies and corporations
    
    $
    9,535
    
    
    $
    6,502
    
    
    $
    9,091Mortgage-backed securities
    
    
    51,367
    
    
    
    40,851
    
    
    
    38,308Obligations of states and political subdivisions
    
    
    13,612
    
    
    
    9,663
    
    
    
    2,307Total
    
    
    74,514
    
    
    
    57,016
    
    
    
    49,706Securities held to maturity:Obligations of states and political subdivisions
    
    
    1,480
    
    
    
    1,411
    
    
    
    999
  MaturityOne year or
    
    
    
    
    
    
    After one year
    
    
    
    
    
    
    After five years
    
    
    
    
    
    
    After tenless
    
    
    Yield
    
    
    through five years
    
    
    Yield
    
    
    through ten years
    
    
    Yield
    
    
    years
    
    
    Yield(Dollars in Thousands)U.S. Treasury and government
agencies and corporations
    
    $
    0
    
    
    
    0.00
    %
    
    $
    3,229
    
    
    
    4.25
    %
    
    $
    2,389
    
    
    
    3.14
    %
    
    $
    3,917
    
    
    
    5.15
    %Mortgage-backed securities
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    8,936
    
    
    
    11.76
    %
    
    
    42,432
    
    
    
    55.84
    %Obligations of state and political subdivisions
    
    
    0
    
    
    
    0.00
    %
    
    
    1022
    
    
    
    1.34
    %
    
    
    3,016
    
    
    
    3.97
    %
    
    
    11,053
    
    
    
    14.54
    %Total
    
    $
    0
    
    
    
    
    
    
    $
    4,251
    
    
    
    
    
    
    $
    14,341
    
    
    
    
    
    
    $
    57,402
 39




---



##### Table of Contents



Deposits
  2006
    
    2005
    
    $ change
    
    % changeTotal deposits
    
    $
    361,729,293
    
    
    $
    283,123,790
    
    
    $
    78,605,503
    
    
    
    27.76
    %
  2006
    
    2005
    
    $ change
    
    % changeInterest-bearing
deposits
    
    $
    301,713,772
    
    
    $
    229,578,802
    
    
    $
    72,134,970
    
    
    
    31.42
    %Non-interest-
bearing deposits
    
    $
    60,015,521
    
    
    $
    53,544,988
    
    
    $
    6,470,533
    
    
    
    12.08
    %
  2006
    
    2005
    
    $ change
    
    % changeNOW accounts
    
    $
    76,069,791
    
    
    $
    56,758,028
    
    
    $
    19,311,763
    
    
    
    34.02
    %Time deposits
    
    $
    171,702,308
    
    
    $
    121,848,466
    
    
    $
    49,853,842
    
    
    
    40.91
    %Money market
accounts
    
    $
    45,666,777
    
    
    $
    43,356,326
    
    
    $
    2,310,451
    
    
    
    5.33
    %Savings
    
    $
    8,274,896
    
    
    $
    7,615,982
    
    
    $
    658,914
    
    
    
    8.65
    %
  2006
    
    2005
    
    $ change
    
    % changeBrokered deposits
    
    $
    51,378,530
    
    
    $
    23,099,738
    
    
    $
    28,278,792
    
    
    
    122.42
    %
  40




---



##### Table of Contents



2006
    
    
    2005
    
    
    2004Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in Thousands)Non-interest-bearing demand deposits
    
    $
    54,163
    
    
    
    0
    %
    
    $
    46,187
    
    
    
    0
    %
    
    $
    35,816
    
    
    
    0
    %Interest-bearing demand deposits
    
    
    120,268
    
    
    
    3.72
    %
    
    
    98,356
    
    
    
    2.18
    %
    
    
    79,254
    
    
    
    1.33
    %Savings deposits
    
    
    7,860
    
    
    
    0.61
    %
    
    
    6,764
    
    
    
    0.59
    %
    
    
    6,112
    
    
    
    0.59
    %Time deposits
    
    
    146,013
    
    
    
    4.28
    %
    
    
    117,416
    
    
    
    2.98
    %
    
    
    99,664
    
    
    
    2.12
    %Total
    
    $
    328,304
    
    
    
    
    
    
    $
    268,723
    
    
    
    
    
    
    $
    220,846
  (Dollars inThousands)Three months or less
    
    $
    32,288Over three months through six months
    
    
    24,062Over six months through 12 months
    
    
    30,704Over 12 months
    
    
    30,622Total
    
    $
    117,676
  2006
    
    2005
    
    $ change
    
    % changeAverage interest-
bearing demand
and savings
    
    $
    128,128,170
    
    
    $
    105,120,140
    
    
    $
    23,008,030
    
    
    
    21.89
    %
   41




---



##### Table of Contents



December 31,
    
    
    %2006
    
    
    2005
    
    
    CHANGE(in thousands)Non-Interest bearing accounts
    
    $
    60,015
    
    
    $
    53,545
    
    
    
    12.1
    %NOW Accounts
    
    
    76,070
    
    
    
    56,758
    
    
    
    34.0
    %Money Market Accounts
    
    
    45,667
    
    
    
    43,356
    
    
    
    5.3
    %Savings Accounts
    
    
    8,275
    
    
    
    7,616
    
    
    
    8.7
    %Certificates of Deposits
    
    
    162,849
    
    
    
    115,190
    
    
    
    41.4
    %Individual Retirement Accounts
    
    
    8,853
    
    
    
    6,659
    
    
    
    33.0
    %Total Deposits
    
    $
    361,729
    
    
    $
    283,124
    
    
    
    27.8
    %
 Interest Rate Sensitivity Management
     42




---



##### Table of Contents



43




---



##### Table of Contents



Analysis of Interest Sensitivity
As of December 31, 2006
(Dollars in Thousands)
 0  3
    
    
    3 - 12
    
    
    1 - 3
    
    
    Over 3Months
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalFederal funds sold
    
    $
    1,679
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    1,679Securities
    
    
    1,953
    
    
    
    5,859
    
    
    
    16,481
    
    
    
    51,701
    
    
    
    75,994Loans (1)
    
    
    213,136
    
    
    
    44,604
    
    
    
    55,974
    
    
    
    30,995
    
    
    
    344,709Total interest-earning assets
    
    $
    216,768
    
    
    $
    50,463
    
    
    $
    72,455
    
    
    $
    82,696
    
    
    $
    422,382Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    121,737
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    121,737Savings
    
    
    8,275
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    8,275Time deposits
    
    
    47,802
    
    
    
    86,263
    
    
    
    24,578
    
    
    
    13,059
    
    
    
    171,702Other borrowings
    
    
    24,825
    
    
    
    12,000
    
    
    
    7,760
    
    
    
    7,700
    
    
    
    52,285Total interest-bearing liabilities
    
    $
    202,639
    
    
    $
    98,263
    
    
    $
    32,338
    
    
    $
    20,759
    
    
    $
    353,999Interest rate sensitivity gap
    
    $
    14,129
    
    
    $
    (47,800
    )
    
    $
    40,117
    
    
    $
    61,937
    
    
    $
    68,383Cumulative interest rate sensitivity gap
    
    $
    14,129
    
    
    $
    (33,671
    )
    
    $
    (6,446
    )
    
    $
    68,383Interest rate sensitivity gap ratio
    
    
    6.52
    %
    
    
    (94.72
    %)
    
    
    55.37
    %
    
    
    74.90
    %Cumulative interest rate sensitivity
gap ratio
    
    
    6.52
    %
    
    
    (12.60
    %)
    
    
    (1.90
    %)
    
    
    16.19
    %
 
 (1)
    
    Includes nonaccrual loans.   44




---



##### Table of Contents



Return on Assets and Equity
  For the Years EndedDecember 31,2006
    
    2005
    
    2004Return on Average Assets
    
    
    0.95
    %
    
    
    0.98
    %
    
    
    0.85
    %Return on Average Equity
    
    
    11.26
    %
    
    
    16.87
    %
    
    
    14.53
    %Average Equity as a Percentage of Average Assets
    
    
    8.48
    %
    
    
    5.79
    %
    
    
    7.07
    %Dividend Payout Ratio
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
 Capital Adequacy and Liquidity
   Regulatory Capital Requirements
    45




---



##### Table of Contents



December 31, 2006
    
    December 31, 2005Tier 1 Risk-Based Capital
    
    
    11.33
    %
    
    
    12.06
    %Regulatory Minimum
    
    
    4.00
    
    
    
    4.00Well-capitalized
    
    
    6.00
    
    
    
    6.00Total Risk-Based Capital
    
    
    12.22
    %
    
    
    13.02
    %Regulatory Minimum
    
    
    8.00
    
    
    
    8.00Well-capitalized
    
    
    10.00
    
    
    
    10.00Tier 1 Leverage
    
    
    9.99
    %
    
    
    9.57
    %Regulatory Minimum
    
    
    4.00
    
    
    
    4.00Well-capitalized
    
    
    5.00
    
    
    
    5.00
    46




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Commitments and Lines of Credit
   (Dollars in thousands)2006
    
    
    2005Commitments to extend credit
    
    $
    110,963
    
    
    $
    86,283Standby letters of credit
    
    
    12,250
    
    
    
    4,084Totals
    
    $
    123,213
    
    
    $
    90,367
  2006
    
    2005
    
    $ change
    
    % changeCommitments
    
    $
    75,694,000
    
    
    $
    57,512,000
    
    
    $
    18,182,000
    
    
    
    31.61
    %
  47




---



##### Table of Contents



Effects of Inflation
   
 ITEM 7. FINANCIAL STATEMENTS
    48




---



##### Table of Contents



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  49




---



##### Table of Contents



ITEM 8A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 ITEM 8B. OTHER INFORMATION
  
 PART III
 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
  
 ITEM 10. EXECUTIVE COMPENSATION
  50




---



##### Table of Contents



ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 13. EXHIBITS
  Exhibit No.
    
    Description of Exhibit2.1
    
    Plan of Reorganization dated March 28, 2003, by and between
the Registrant and Mountain National Bank (included as Exhibit
2.1 to the Report on Form 8-K12G3 of the Registrant, 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
Registrant, 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 Registrant, as amended
(included as Exhibit 3.1 to the Report on Form 8-K of the
Registrant, dated May 19, 2006 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference).3.2
    
    Bylaws of the Registrant, as amended (included as Exhibit 3.2
to the Report on Form 8-K of the Registrant, dated May 19,
2006 (File No. 000-49912), previously filed with the
Commission and incorporated herein by reference).10.1
    
    Stock Option Plan of the Registrant, as amended (included as
Exhibit 10.1 to the Report on Form 8-K of the Registrant,
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
Registrant)
 51




---



##### Table of Contents



Exhibit No.
    
    Description of Exhibit(included as Exhibit 10.3 to the Registrants Form
10-KSB for the year ended December 31, 2002 and incorporated
herein by reference)*10.3
    
    Form of Warrant Agreement (included as Exhibit 10.5 to the
Registrants Form SB-2/A filed with the Commission on August
23, 2005)10.4
    
    Employment Agreement dated as of May 18, 2006 by and between
Mountain National Bancshares, Inc. and Dwight Grizzell
(included as Exhibit 10.2 to the Report on Form 8-K of the
Registrant, dated May 19, 2006 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)*10.5
    
    Employment Agreement dated as of May 18, 2006 by and between
Mountain National Bancshares, Inc. and Grace McKinzie
(included as Exhibit 10.3 to the Report on Form 8-K of the
Registrant, dated May 19, 2006 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)*10.6
    
    Employment Agreement dated as of May 18, 2006 by and between
Mountain National Bancshares, Inc. and Michael Brown (included
as Exhibit 10.4 to the Report on Form 8-K of the Registrant,
dated May 19, 2006 (File No. 000-49912), previously filed with
the Commission and incorporated herein by reference)*21
    
    Subsidiaries of the Registrant23.1
    
    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. 52




---



##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  53




---



##### Table of Contents



SIGNATURES
  MOUNTAIN NATIONAL BANCSHARES, INC.
                          (Registrant)By:
    
    /s/ Dwight B. GrizzellDwight B. GrizzellPresident and Chief Executive OfficerDate: April 2, 2007
  /s/ Dwight B. Grizzell
    
    Date: April 2, 2007Dwight B. Grizzell, President,Chief Executive Officer and Director/s/ Richard A. Hubbs
    
    Date: April 2, 2007Richard A. Hubbs, Senior Vice President and
Chief Financial Officer/s/ James E. Bookstaff
    
    Date: April 2, 2007James E. Bookstaff, Director/s/ Gary A. Helton
    
    Date: April 2, 2007Gary A. Helton, Director/s/ Charlie R. Johnson
    
    Date: April 2, 2007Charlie R. Johnson, Director/s/ Sam L. Large
    
    Date: April 2, 2007Sam L. Large, Director
 54




---



##### Table of Contents



/s/ Jeffrey J. Monson
    
    Date: April 2, 2007Jeffrey J. Monson, Director/s/ Linda N. Ogle
    
    Date: April 2, 2007Linda N. Ogle, Director/s/ Michael C. Ownby
    
    Date: April 2, 2007Michael C. Ownby, Director/s/ John R. Parker
    
    Date: April 2, 2007John R. Parker, Director/s/ Ruth Reams
    
    Date: April 2, 2007Ruth Reams, Director
 55




---



##### Table of Contents



MOUNTAIN NATIONAL BANCSHARES, INC.
AND SUBSIDIARY
 CONSOLIDATED FINANCIAL REPORT
 DECEMBER 31, 2006




---



##### Table of Contents



CONTENTS
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-1CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheets
    
    
    F-2Consolidated statements of income
    
    
    F-3Consolidated statements of changes in shareholders equity
    
    
    F-4Consolidated statements of cash flows
    
    
    F-5Notes to consolidated financial statements
    
    
    F-6 - F-36




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    
 F-1




---



##### Table of Contents



2006
    
    
    2005ASSETSCash and due from banks
    
    $
    11,717,179
    
    
    $
    17,866,025Federal funds sold
    
    
    1,679,000
    
    
    
    2,032,000Total cash and cash equivalents
    
    
    13,396,179
    
    
    
    19,898,025Securities available for sale
    
    
    74,514,075
    
    
    
    57,016,193Securities held to maturity, fair value $1,577,130 in 2006 and $1,391,330 in 2005
    
    
    1,479,620
    
    
    
    1,411,390Restricted investments, at cost
    
    
    2,621,167
    
    
    
    1,628,868Loans, net of allowance for loan losses of $3,524,374 in 2006 and $2,634,175 in
2005
    
    
    341,184,441
    
    
    
    246,229,914Investment in partnership
    
    
    4,093,228
    
    
    
    Premises and equipment
    
    
    19,944,484
    
    
    
    15,650,863Accrued interest receivable
    
    
    2,638,219
    
    
    
    1,524,665Cash surrender value of life insurance
    
    
    8,314,168
    
    
    
    7,814,279Other assets
    
    
    1,796,435
    
    
    
    1,474,704Total assets
    
    $
    469,982,016
    
    
    $
    352,648,901LIABILITIES AND SHAREHOLDERS
EQUITYDeposits:Noninterest-bearing demand deposits
    
    $
    60,015,521
    
    
    $
    53,544,988NOW accounts
    
    
    76,069,791
    
    
    
    56,758,028Money market accounts
    
    
    45,666,777
    
    
    
    43,356,326Savings accounts
    
    
    8,274,896
    
    
    
    7,615,982Time deposits
    
    
    171,702,308
    
    
    
    121,848,466Total deposits
    
    
    361,729,293
    
    
    
    283,123,790Federal funds purchased
    
    
    15,575,000
    
    
    
    1,500,000Securities sold under agreements to repurchase
    
    
    5,860,386
    
    
    
    3,379,006Accrued interest payable
    
    
    956,224
    
    
    
    434,341Subordinated debentures
    
    
    13,403,000
    
    
    
    5,671,000Federal Home Loan Bank advances
    
    
    36,710,212
    
    
    
    22,509,744Other liabilities
    
    
    1,337,038
    
    
    
    6,398,012Total liabilities
    
    
    435,571,153
    
    
    
    323,015,893Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1.00 par value; 10,000,000 shares authorized;
issued and outstanding 1,943,428 shares at December 31,
2006 and 1,801,748 shares at
December 31, 2005
    
    
    1,943,428
    
    
    
    1,801,748Additional paid-in capital
    
    
    27,096,848
    
    
    
    23,689,964Retained earnings
    
    
    6,068,324
    
    
    
    4,983,907Accumulated other comprehensive loss
    
    
    (697,737
    )
    
    
    (842,611
    )Total shareholders equity
    
    
    34,410,863
    
    
    
    29,633,008Total liabilities and
shareholders equity
    
    $
    469,982,016
    
    
    $
    352,648,901
  F-2




---



##### Table of Contents



2006
    
    
    2005INTEREST INCOMELoans
    
    $
    25,286,787
    
    
    $
    16,545,038Taxable securities
    
    
    2,947,926
    
    
    
    2,108,720Tax-exempt securities
    
    
    529,232
    
    
    
    395,695Federal funds sold and deposits in other banks
    
    
    236,900
    
    
    
    174,636Total interest income
    
    
    29,000,845
    
    
    
    19,224,089INTEREST EXPENSEDeposits
    
    
    10,773,481
    
    
    
    5,685,712Federal funds purchased
    
    
    149,443
    
    
    
    38,563Repurchase agreements
    
    
    101,947
    
    
    
    64,165Federal Home Loan Bank advances
    
    
    1,343,901
    
    
    
    610,943Subordinated debentures
    
    
    748,370
    
    
    
    350,152Total interest expense
    
    
    13,117,142
    
    
    
    6,749,535Net interest income
    
    
    15,883,703
    
    
    
    12,474,554Provision for loan losses
    
    
    915,000
    
    
    
    446,000Net interest income after
provision for loan losses
    
    
    14,968,703
    
    
    
    12,028,554NONINTEREST INCOMEService charges on deposit accounts
    
    
    1,293,026
    
    
    
    1,141,994Other fees and commissions
    
    
    1,019,664
    
    
    
    890,742Gain on sale of mortgage loans
    
    
    424,536
    
    
    
    400,657Gain on securities available for sale, net
    
    
    
    
    
    
    55,378Other noninterest income
    
    
    509,173
    
    
    
    187,313Total noninterest income
    
    
    3,246,399
    
    
    
    2,676,084NONINTEREST EXPENSESalaries and employee benefits
    
    
    7,542,991
    
    
    
    5,372,600Occupancy expenses
    
    
    956,688
    
    
    
    851,855Other operating expenses
    
    
    4,522,713
    
    
    
    3,903,100Total noninterest expense
    
    
    13,022,392
    
    
    
    10,127,555Income before income taxes
    
    
    5,192,710
    
    
    
    4,577,083Income taxes
    
    
    1,295,337
    
    
    
    1,453,581Net income
    
    $
    3,897,373
    
    
    $
    3,123,502EARNINGS PER SHAREBasic
    
    $
    2.03
    
    
    $
    1.90Diluted
    
    $
    1.88
    
    
    $
    1.73
  F-3




---



##### Table of Contents



AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalComprehensive
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersIncome
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    EquityBALANCE, January 1, 2005
    
    
    
    
    
    $
    1,268,614
    
    
    $
    12,059,704
    
    
    $
    3,400,852
    
    
    $
    (190,257
    )
    
    $
    16,538,913Exercise of stock options, 58,600 shares (adjusted for 5% stock dividend)
    
    
    
    
    
    
    53,152
    
    
    
    674,677
    
    
    
    
    
    
    
    
    
    
    
    727,8295% stock dividend
    
    
    
    
    
    
    63,482
    
    
    
    1,460,720
    
    
    
    (1,540,447
    )
    
    
    
    
    
    
    (16,245
    )Issuance of Common Stock
    
    
    
    
    
    
    416,500
    
    
    
    9,494,863
    
    
    
    
    
    
    
    
    
    
    
    9,911,363Comprehensive income:Net income
    
    $
    3,123,502
    
    
    
    
    
    
    
    
    
    
    
    3,123,502
    
    
    
    
    
    
    
    3,123,502Other comprehensive income, net of tax:Unrealized holding loss on securities available for sale, net of reclassification adjustment
    
    
    (652,354
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (652,354
    )
    
    
    (652,354
    )Total comprehensive income
    
    $
    2,471,148BALANCE, December 31, 2005
    
    
    
    
    
    
    1,801,748
    
    
    
    23,689,964
    
    
    
    4,983,907
    
    
    
    (842,611
    )
    
    
    29,633,008Exercise of stock options, 39,291 shares (adjusted for 5% stock dividend)
    
    
    
    
    
    
    35,880
    
    
    
    296,895
    
    
    
    
    
    
    
    
    
    
    
    332,775Exercise of stock warrants, 15,668 shares (adjusted for 5% stock dividend)
    
    
    
    
    
    
    14,922
    
    
    
    343,206
    
    
    
    
    
    
    
    
    
    
    
    358,1285% stock dividend
    
    
    
    
    
    
    90,878
    
    
    
    2,699,077
    
    
    
    (2,812,956
    )
    
    
    
    
    
    
    (23,001
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    67,706
    
    
    
    
    
    
    
    
    
    
    
    67,706Comprehensive income:Net income
    
    $
    3,897,373
    
    
    
    
    
    
    
    
    
    
    
    3,897,373
    
    
    
    
    
    
    
    3,897,373Other comprehensive income, net of tax:Unrealized holding loss on securities available for sale, net of reclassification adjustment
    
    
    144,874
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,874
    
    
    
    144,874Total comprehensive income
    
    $
    4,042,247BALANCE, December 31, 2006
    
    
    
    
    
    $
    1,943,428
    
    
    $
    27,096,848
    
    
    $
    6,068,324
    
    
    $
    (697,737
    )
    
    $
    34,410,863
  F-4




---



##### Table of Contents



2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    3,897,373
    
    
    $
    3,123,502Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,016,841
    
    
    
    913,490Net realized gains on securities available for sale
    
    
    
    
    
    
    (55,378
    )Net amortization on securities
    
    
    219,270
    
    
    
    290,013Provision for loan losses
    
    
    915,000
    
    
    
    446,000Gain on sale of other real estate
    
    
    (29,095
    )
    
    
    (9,201
    )Deferred Income Taxes
    
    
    (302,492
    )
    
    
    (98,247
    )Gross mortgage loans originated for sale
    
    
    (43,014,644
    )
    
    
    (40,599,140
    )Gross proceeds from sale of mortgage loans
    
    
    42,354,341
    
    
    
    41,683,581Gain on sale of mortgage loans
    
    
    (424,536
    )
    
    
    (400,657
    )Increase in cash surrender value of life insurance
    
    
    (307,101
    )
    
    
    (122,672
    )Share-based compensation
    
    
    67,706
    
    
    
    Activity in held-to-maturity securities:Increase due to accretion
    
    
    (68,230
    )
    
    
    (53,577
    )Change in operating assets and liabilities:Accrued interest receivable
    
    
    (1,113,554
    )
    
    
    (483,346
    )Accrued interest payable
    
    
    521,883
    
    
    
    208,746Other assets and liabilities
    
    
    (5,237,305
    )
    
    
    5,474,005Net cash (used)/provided in operating activities
    
    
    (1,504,543
    )
    
    
    10,317,119CASH FLOWS FROM INVESTING ACTIVITIESActivity in available-for-sale securities:Proceeds from sales, maturities, and calls
    
    
    9,009,587
    
    
    
    18,712,335Purchases
    
    
    (26,581,864
    )
    
    
    (26,908,968
    )Activity in held-to-maturity securities:Purchases
    
    
    
    
    
    
    (358,930
    )Purchases of other investments
    
    
    (992,299
    )
    
    
    (361,563
    )Investment in partnership
    
    
    (4,093,228
    )
    
    
    Loan originations and principal collections, net
    
    
    (94,784,688
    )
    
    
    (40,462,915
    )Purchase of premises and equipment
    
    
    (5,310,462
    )
    
    
    (1,683,355
    )Purchase of life insurance
    
    
    (192,788
    )
    
    
    (3,760,994
    )Proceeds from sale of other real estate
    
    
    186,185
    
    
    
    596,194Net cash used in investing activities
    
    
    (122,759,557
    )
    
    
    (54,228,196
    )CASH FLOWS FROM FINANCING ACTIVITIESNet increase in deposits
    
    
    78,605,503
    
    
    
    38,051,771Proceeds from Federal Home Loan Bank advances
    
    
    32,250,000
    
    
    
    24,100,000Matured Federal Home Loan Bank advances
    
    
    (18,049,532
    )
    
    
    (11,140,256
    )Net increase/(decrease) in federal funds purchased
    
    
    14,075,000
    
    
    
    (7,125,000
    )Net increase in securities sold under
agreements to repurchase
    
    
    2,481,380
    
    
    
    529,439Proceeds from sale of stock options and warrants
    
    
    690,903
    
    
    
    10,639,191Proceeds
from issuance of subordinated debentures
    
    
    7,732,000
    
    
    
    Dividends
    
    
    (23,001
    )
    
    
    (16,245
    )Net cash provided by financing activities
    
    
    117,762,253
    
    
    
    55,038,900NET (DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS
    
    
    (6,501,847
    )
    
    
    11,127,823CASH AND CASH EQUIVALENTS, beginning of year
    
    
    19,898,025
    
    
    
    8,770,202CASH AND CASH EQUIVALENTS, end of period
    
    $
    13,396,178
    
    
    $
    19,898,025SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for interest
    
    $
    12,595,260
    
    
    $
    6,540,789Cash paid during the period for taxes
    
    $
    1,590,000
    
    
    $
    1,677,906
  F-5




---



##### Table of Contents



F-6




---



##### Table of Contents



F-7




---



##### Table of Contents



F-8




---



##### Table of Contents



F-9




---



##### Table of Contents



F-10




---



##### Table of Contents



F-11




---



##### Table of Contents



F-12




---



##### Table of Contents



2005Net income, as reported
    
    $
    3,123,502Effect of stock-based employee compensation
expense determined under fair value method
for all awards, net of the related tax effects
    
    
    (66,314
    )Pro forma net income
    
    $
    3,057,188Earnings per share:Basic-as reported
    
    $
    1.90Basic-pro forma
    
    $
    1.86Diluted-as reported
    
    $
    1.73Diluted-pro forma
    
    $
    1.69
   F-13




---



##### Table of Contents



2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U.S. Government
securities
    
    $
    244,804
    
    
    $
    
    
    
    $
    (1,757
    )
    
    $
    243,047U.S. Government
agencies
    
    
    9,373,006
    
    
    
    15,888
    
    
    
    (97,387
    )
    
    
    9,291,507Obligations of states and
political subdivisions
    
    
    13,661,394
    
    
    
    19,863
    
    
    
    (69,533
    )
    
    
    13,611,724Mortgage-backed
securities
    
    
    52,192,757
    
    
    
    120,799
    
    
    
    (945,759
    )
    
    
    51,367,797$
    75,471,961
    
    
    $
    156,550
    
    
    $
    (1,114,436
    )
    
    $
    74,514,075Securities held to maturity:Obligations of states and
political subdivisions
    
    $
    1,479,620
    
    
    $
    97,510
    
    
    $
    
    
    
    $
    1,577,130
 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U.S. Government
securities
    
    $
    241,900
    
    
    $
    
    
    
    $
    (64
    )
    
    $
    241,836U.S. Government
agencies
    
    
    6,410,586
    
    
    
    
    
    
    
    (151,152
    )
    
    
    6,259,434Obligations of states and
political subdivisions
    
    
    9,640,394
    
    
    
    260,848
    
    
    
    (238,326
    )
    
    
    9,662,916Mortgage-backed
securities
    
    
    41,999,996
    
    
    
    692
    
    
    
    (1,148,681
    )
    
    
    40,852,007$
    58,292,876
    
    
    $
    261,540
    
    
    $
    (1,538,223
    )
    
    $
    57,016,193Securities held to maturity:Obligations of states and
political subdivisions
    
    $
    1,411,390
    
    
    $
    
    
    
    $
    (20,060
    )
    
    $
    1,391,330
 F-14




---



##### Table of Contents



December
31,2006:
 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
    
    $
    243,047
    
    
    $
    (1,757
    )
    
    $
    
    
    
    $
    
    
    
    $
    243,047
    
    
    $
    (1,757
    )U.S. Government agencies
    
    
    995,625
    
    
    
    (449
    )
    
    
    6,315,413
    
    
    
    (96,938
    )
    
    
    7,311,038
    
    
    
    (97,387
    )Obligations
of states and political subdivisions
    
    
    5,108,969
    
    
    
    (23,492
    )
    
    
    3,407,529
    
    
    
    (46,041
    )
    
    
    8,516,498
    
    
    
    (69,533
    )Mortgage-backed
securities
    
    
    9,274,782
    
    
    
    (38,301
    )
    
    
    33,134,818
    
    
    
    (907,458
    )
    
    
    42,409,600
    
    
    
    (945,759
    )Total temporarily impaired
    
    $
    15,622,423
    
    
    $
    (63,999
    )
    
    $
    42,857,760
    
    
    $
    (1,050,437
    )
    
    $
    58,480,183
    
    
    $
    (1,114,436
    )
 December
31, 2005:
 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
    
    $
    241,836
    
    
    $
    (64
    )
    
    $
    
    
    
    $
    
    
    
    $
    241,836
    
    
    $
    (64
    )U.S. Government agencies
    
    
    1,960,313
    
    
    
    (36,348
    )
    
    
    4,299,122
    
    
    
    (114,804
    )
    
    
    6,259,435
    
    
    
    (151,152
    )Obligations
of states and political subdivisions
    
    
    9,409,585
    
    
    
    (236,993
    )
    
    
    486,325
    
    
    
    (21,393
    )
    
    
    9,895,910
    
    
    
    (258,386
    )Mortgage-backed
securities
    
    
    18,762,358
    
    
    
    (342,952
    )
    
    
    22,021,668
    
    
    
    (805,729
    )
    
    
    40,784,026
    
    
    
    (1,148,681
    )Total temporarily impaired
    
    $
    30,374,092
    
    
    $
    (616,357
    )
    
    $
    26,807,115
    
    
    $
    (941,926
    )
    
    $
    57,181,207
    
    
    $
    (1,558,283
    )
  F-15




---



##### Table of Contents



Securities Available for Sale
    
    
    Securities Held to MaturityAmortized
    
    
    Market
    
    
    Amortized
    
    
    MarketCost
    
    
    Value
    
    
    Cost
    
    
    ValueDue in one year or less
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Due more than one year
through five years
    
    
    4,257,203
    
    
    
    4,250,425
    
    
    
    
    
    
    
    Due more than five years
through ten years
    
    
    5,441,926
    
    
    
    5,405,110
    
    
    
    
    
    
    
    Due after ten years
    
    
    13,580,075
    
    
    
    13,490,743
    
    
    
    1,479,620
    
    
    
    1,577,130Mortgage-backed
securities
    
    
    52,192,757
    
    
    
    51,367,797
    
    
    
    
    
    
    
    $
    74,471,961
    
    
    $
    74,514,075
    
    
    $
    1,479,620
    
    
    $
    1,577,130
 F-16




---



##### Table of Contents



2006
    
    
    2005Mortgage loans on real estate:Residential 1-4 family
    
    $
    50,042,141
    
    
    $
    45,399,332Residential multifamily
    
    
    4,505,251
    
    
    
    4,745,163Commercial
    
    
    92,814,521
    
    
    
    76,865,481Construction
    
    
    137,988,968
    
    
    
    80,718,991Second mortgages
    
    
    3,545,056
    
    
    
    2,630,052Equity lines of credit
    
    
    22,178,562
    
    
    
    15,258,439311,074,499
    
    
    
    225,617,458Commercial loans
    
    
    26,062,248
    
    
    
    15,375,236Consumer installment loans:Personal
    
    
    5,750,604
    
    
    
    6,402,307Credit cards
    
    
    1,821,464
    
    
    
    1,469,088
 7,572,068
    
    
    
    7,871,395Total loans
    
    
    344,708,815
    
    
    
    248,864,089Less: Allowance for loan losses
    
    
    (3,524,374
    )
    
    
    (2,634,175
    )Loans, net
    
    $
    341,184,441
    
    
    $
    246,229,914
  2006
    
    
    2005Balance, beginning of year
    
    $
    2,634,175
    
    
    $
    2,280,554Provision for loan losses
    
    
    915,000
    
    
    
    446,000Loans charged-off
    
    
    (48,957
    )
    
    
    (108,904
    )Recoveries of loans previously charged-off
    
    
    24,156
    
    
    
    16,525Balance, end of year
    
    $
    3,524,374
    
    
    $
    2,634,175
 F-17




---



##### Table of Contents



2006
    
    
    2005Year-end loans with allocated allowance
for loan losses
    
    $
    1,677,832
    
    
    $
    902,422Allowance for loan losses on impaired
loans
    
    
    235,400
    
    
    
    48,378Average of individually impaired loans
during the year
    
    
    1,543,670
    
    
    
    767,682
  2006
    
    2005Loans past due over 90 days still on accrual
    
    
    
    
    

    $
    470,162
    
    
    $
    342,400Nonaccrual loans
    
    
    
    
    
    
    
    
    
    
    92,031
    F-18




---



##### Table of Contents



2006
    
    
    2005Land
    
    $
    7,952,709
    
    
    $
    3,872,631Buildings and improvements
    
    
    10,772,348
    
    
    
    10,423,195Furniture, fixtures and equipment
    
    
    5,380,975
    
    
    
    4,545,49724,106,033
    
    
    
    18,841,323Accumulated depreciation
    
    
    (4,161,549
    )
    
    
    (3,190,460
    )$
    19,944,484
    
    
    $
    15,650,863
     2007
    
    $
    134,065,0482008
    
    
    16,185,8862009
    
    
    8,392,0932010
    
    
    6,645,4622011
    
    
    6,413,819Total
    
    $
    171,702,308
  F-19




---



##### Table of Contents



2006
    
    
    2005Current tax expense
    
    $
    1,597,829
    
    
    $
    1,551,828Deferred tax expense (benefit)
    
    
    (302,492
    )
    
    
    (98,247
    )Income tax expense
    
    $
    1,295,337
    
    
    $
    1,453,581
  2006
    
    
    2005Expected tax at statutory rates
    
    $
    1,766,000
    
    
    $
    1,556,000Increase (decrease) resulting from tax effect of:State income taxes, net of federal tax
    
    
    (97,308
    )
    
    
    28,973Increase in cash surrender value of life insurance
    
    
    (104,414
    )
    
    
    (41,700
    )Tax exempt interest
    
    
    (178,324
    )
    
    
    (134,000
    )General business credits, net of basis reduction
    
    
    (132,000
    )
    
    
    Other
    
    
    41,383
    
    
    
    44,308Income tax expense
    
    $
    1,295,337
    
    
    $
    1,453,581
  2006
    
    
    2005Deferred tax assets:Allowance for loan losses
    
    $
    1,055,168
    
    
    $
    733,367Deferred compensation
    
    
    121,653
    
    
    
    60,401Unrealized loss on securities available for sale
    
    
    260,150
    
    
    
    434,072Other
    
    
    86,817
    
    
    
    Total deferred tax assets
    
    
    1,523,788
    
    
    
    1,227,840Deferred tax liabilities:Accelerated depreciation
    
    
    (458,602
    )
    
    
    (485,863
    )Prepaid expenses
    
    
    (226,433
    )
    
    
    (121,903
    )Other
    
    
    (180,854
    )
    
    
    (90,745
    )Total deferred tax liabilities
    
    
    (865,889
    )
    
    
    (698,511
    )Net deferred tax asset
    
    $
    657,899
    
    
    $
    529,329
 F-20




---



##### Table of Contents



FHLB advances consisted of the following at December 31:
    
    2006
    
    
    2005Short-term advance requiring monthly interest payments
at 5.34% variable, principal due in January 2007
    
    
    4,250,000
    
    
    
    Short-term advance requiring monthly interest payments
at 5.34% variable, principal due in January 2007
    
    
    1,000,000
    
    
    
    Long-term advance requiring monthly interest payments
at 5.43% fixed, principal due in November 2007
    
    
    7,000,000
    
    
    
    Long-term callable advance requiring monthly interest payments
at 4.39% fixed, principal due in November 2011
    
    
    7,500,000
    
    
    
    Long-term advance requiring monthly interest payments
at 4.47% fixed, principal due in December 2012
    
    
    200,000
    
    
    
    200,000Long-term advance requiring monthly interest payments
at 4.32% fixed, principal due in June 2010
    
    
    200,000
    
    
    
    200,000Long-term advance requiring monthly interest payments
at 4.83% fixed, principal due in October 2008
    
    
    3,000,000
    
    
    
    3,000,000Long-term advance requiring monthly principal and interest
payments at 4.20% fixed, remaining principal due in July 2008
    
    
    1,860,212
    
    
    
    1,959,744Long-term advance requiring monthly interest payments
at 4.15% fixed, principal due in June 2008
    
    
    2,500,000
    
    
    
    2,500,000Long-term advance requiring monthly interest payments
at 4.12% fixed, principal due in June 2008
    
    
    200,000
    
    
    
    200,000Long-term advance requiring monthly interest payments
at 4.84% fixed, principal due in December 2007
    
    
    2,500,000
    
    
    
    2,500,000
 F-21




---



##### Table of Contents



Note 7. Federal Home Loan Bank Advances (continued)Long-term advance requiring monthly interest payments
at 4.06% fixed, principal due in June 2007
    
    
    2,500,000
    
    
    
    2,500,000Long-term advance requiring monthly interest payments
at 5.80% variable, principal due in March 2007
    
    
    4,000,000
    
    
    
    4,000,000Long-term advance requiring monthly interest payments
at 3.44% fixed, principal due in December 2006
    
    
    
    
    
    
    2,500,000Long-term advance requiring monthly interest payments
at 3.12% fixed, principal due in August 2006
    
    
    
    
    
    
    2,950,000$
    36,710,212
    
    
    $
    22,509,744
      2006
    
    
    2005Weighted average borrowing rate at year-end
    
    
    2.67
    %
    
    
    1.04
    %Weighted average borrowing rate during the year
    
    
    2.13
    %
    
    
    1.50
    %Average daily balance during the year
    
    
    4,778,705
    
    
    
    4,287,190Maximum month-end balance during the year
    
    
    6,889,703
    
    
    
    6,575,749Balance at year-end
    
    $
    5,860,386
    
    
    $
    3,379,006
 F-22




---



##### Table of Contents



2007
    
    $
    100,2292008
    
    
    99,2222009
    
    
    100,7082010
    
    
    81,5392011
    
    
    54,135Thereafter
    
    
    79,278Total
    
    $
    515,111
 F-23




---



##### Table of Contents



F-24




---



##### Table of Contents



F-25




---



##### Table of Contents



F-26




---



##### Table of Contents



2006
    
    2005Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    13,396
    
    
    $
    13,396
    
    
    $
    19,898
    
    
    $
    19,898Investment securities
    
    
    75,994
    
    
    
    76,091
    
    
    
    58,428
    
    
    
    58,400Restricted investments
    
    
    2,621
    
    
    
    2,621
    
    
    
    1,629
    
    
    
    1,629Loans
    
    
    341,184
    
    
    
    340,853
    
    
    
    246,230
    
    
    
    245,281Cash surrender value of life insurance
    
    
    8,314
    
    
    
    8,314
    
    
    
    7,814
    
    
    
    7,814Accrued interest receivable
    
    
    2,638
    
    
    
    2,638
    
    
    
    1,525
    
    
    
    1,525Liabilities:Noninterest-bearing demand deposits
    
    $
    60,016
    
    
    $
    60,016
    
    
    $
    53,545
    
    
    $
    53,545NOW accounts
    
    
    76,070
    
    
    
    76,070
    
    
    
    56,758
    
    
    
    56,758Savings and money market accounts
    
    
    53,942
    
    
    
    53,942
    
    
    
    50,972
    
    
    
    50,972Time deposits
    
    
    171,702
    
    
    
    171,596
    
    
    
    121,848
    
    
    
    121,425Subordinated debentures
    
    
    13,403
    
    
    
    14,171
    
    
    
    5,671
    
    
    
    6,449Federal funds purchased and securities
sold under agreements to repurchase
    
    
    21,435
    
    
    
    21,435
    
    
    
    4,879
    
    
    
    4,879Federal Home Loan Bank advances
    
    
    36,710
    
    
    
    36,710
    
    
    
    22,510
    
    
    
    22,510Accrued interest payable
    
    
    956
    
    
    
    956
    
    
    
    434
    
    
    
    434
     F-27




---



##### Table of Contents



Weighted AverageNumber of
    
    
    Weighted Average
    
    
    Remaining
    
    
    Aggregate IntrinsicOptions
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    ValueOptions outstanding, December 31, 2005
    
    
    206,972
    
    
    $
    11.48Options granted
    
    
    6,953
    
    
    
    27.82Options exercised
    
    
    (39,291
    )
    
    
    8.92Options forfeited
    
    
    (243
    )
    
    
    12.34Options outstanding, December 31, 2006
    
    
    174,391
    
    
    
    12.77
    
    
    
    4.25
    
    
    $
    2,312,106Exercisable at December 31, 2006
    
    
    130,194
    
    
    
    10.47
    
    
    
    3.19
    
    
    $
    2,047,096
    2006
    
    2005Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected life
    
    6.5 years
    
    7.0 yearsExpected volatility
    
    
    17
    %
    
    
    10
    %Risk-free interest rate
    
    
    4.67
    %
    
    
    4.28
    %
  F-28




---



##### Table of Contents



F-29




---



##### Table of Contents



For CapitalActual
    
    Adequacy Purposes
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2006:Total capital to risk-weighted assets:Mountain National
Bank
    
    $
    48,520
    
    
    
    12.22
    %
    
    $
    31,764
    
    
    
    8.00
    %
    
    $
    39,705
    
    
    
    10.00
    %Tier I capital to risk-weighted assets:Mountain National
Bank
    
    
    44,996
    
    
    
    11.33
    %
    
    
    15,882
    
    
    
    4.00
    %
    
    
    23,823
    
    
    
    6.00
    %Tier I capital to average assets:Mountain National
Bank
    
    
    44,996
    
    
    
    9.99
    %
    
    
    18,023
    
    
    
    4.00
    %
    
    
    22,528
    
    
    
    5.00
    %
 For CapitalActual
    
    Adequacy Purposes
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2005:Total capital to risk-weighted assets:Mountain National
Bank
    
    $
    35,620
    
    
    
    13.02
    %
    
    $
    21,884
    
    
    
    8.00
    %
    
    $
    27,355
    
    
    
    10.00
    %Tier I capital to risk-weighted assets:Mountain National
Bank
    
    
    32,986
    
    
    
    12.06
    %
    
    
    10,942
    
    
    
    4.00
    %
    
    
    16,413
    
    
    
    6.00
    %Tier I capital to average assets:Mountain National
Bank
    
    
    32,986
    
    
    
    9.57
    %
    
    
    13,785
    
    
    
    4.00
    %
    
    
    17,232
    
    
    
    5.00
    %
   F-30




---



##### Table of Contents



TaxBefore-Tax
    
    
    (Expense)
    
    
    Net-of-TaxAmount
    
    
    Benefit
    
    
    AmountYear ended December 31, 2006:Unrealized holding gains and losses
arising during the period
    
    $
    318,796
    
    
    $
    (173,922
    )
    
    $
    144,874Less reclassification adjustment for
gains realized in net income
    
    
    
    
    
    
    
    
    
    
    $
    318,796
    
    
    $
    (173,922
    )
    
    $
    144,874Year ended December 31, 2005:Unrealized holding gains and losses
arising during the period
    
    $
    (990,929
    )
    
    $
    376,553
    
    
    $
    (614,376
    )Less reclassification adjustment for
gains realized in net income
    
    
    61,255
    
    
    
    (23,277
    )
    
    
    37,978$
    (1,052,184
    )
    
    $
    399,830
    
    
    $
    (652,354
    )
  
  F-31




---



##### Table of Contents



2006
    
    
    2005Net income applicable to common stock
    
    $
    3,897,373
    
    
    $
    3,123,502Average number of common shares outstanding
    
    
    1,923,603
    
    
    
    1,643,370Dilutive effect of stock options
    
    
    66,330
    
    
    
    101,265Dilutive effect of warrants
    
    
    66,437
    
    
    
    60,552Average number of common shares outstanding used
to calculate diluted earnings per common share
    
    
    2,056,370
    
    
    
    1,805,187
     F-32




---



##### Table of Contents



F-33




---



##### Table of Contents



F-34




---



##### Table of Contents



BALANCE
SHEETS
 2006
    
    
    2005ASSETSCash
    
    $
    2,999,826
    
    
    $
    2,459,298Investment in subsidiary
    
    
    44,298,037
    
    
    
    32,143,873Other assets
    
    
    612,969
    
    
    
    497,221Total assets
    
    $
    47,910,832
    
    
    $
    35,100,392LIABILITIES AND SHAREHOLDERS EQUITYNotes payable
    
    $
    13,403,000
    
    
    $
    5,671,000Accrued interest payable
    
    
    134,802
    
    
    
    Other liabilities
    
    
    (37,833
    )
    
    
    (203,616
    )Total liabilities
    
    
    13,499,969
    
    
    
    5,467,384Shareholders equity
    
    
    34,410,863
    
    
    
    29,633,008Total liabilities and stockholders equity
    
    $
    47,910,832
    
    
    $
    35,100,392STATEMENTS OF INCOMEINCOME
    
    $
    
    
    
    $
    EXPENSES
    
    
    881,884
    
    
    
    514,948Loss before equity in undistributed earnings of subsidiary
    
    
    (881,884
    )
    
    
    (514,948
    )Equity in undistributed earnings of subsidiary
    
    
    4,441,584
    
    
    
    3,434,104Income tax benefit
    
    
    337,673
    
    
    
    204,346Net income
    
    $
    3,897,373
    
    
    $
    3,123,502
 F-35




---



##### Table of Contents



2006
    
    
    2005STATEMENTS OF CASH FLOWSCASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    3,897,373
    
    
    $
    3,123,502Adjustments to reconcile net income to net cash
provided by operating activities:Equity in undistributed income of subsidiary
    
    
    (4,441,584
    )
    
    
    (3,434,104
    )Other
    
    
    184,838
    
    
    
    (276,720
    )Net cash provided by (used in) operating activities
    
    
    (359,373
    )
    
    
    (587,322
    )CASH FLOWS FROM INVESTING ACTIVITIESPayments for investments in and advances to subsidiaries
    
    
    (7,500,000
    )
    
    
    (8,000,000
    )Net cash used in investing activities
    
    
    (7,500,000
    )
    
    
    (8,000,000
    )CASH FLOWS FROM FINANCING ACTIVITIESDividends
    
    
    (23,002
    )
    
    
    (16,245
    )Proceeds from issuance of common stock
    
    
    690,903
    
    
    
    10,639,191Proceeds
from issuance of subordinated debentures
    
    
    7,732,000
    
    
    
    Net cash provided by financing activities
    
    
    8,399,901
    
    
    
    10,622,946NET INCREASE IN CASH AND CASH
EQUIVALENTS
    
    
    540,528
    
    
    
    2,035,624CASH AND CASH EQUIVALENTS, beginning of year
    
    
    2,459,298
    
    
    
    423,674CASH AND CASH EQUIVALENTS, end of year
    
    $
    2,999,826
    
    
    $
    2,459,298SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATIONCash paid (received) during the year for:Interest
    
    $
    607,008
    
    
    $
    350,152Income taxes
    
    
    (411,883
    )
    
    
    (131,675
    )
 F-36