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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
 For the fiscal year ended December 31, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission file number: 000-49912
 MOUNTAIN NATIONAL BANCSHARES, INC.
  Tennessee
    
    75-3036312(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)300 East Main Street, Sevierville, Tennessee
    
    37862(Address of principal executive offices)
    
    (Zip code)
 (865) 428-7990
    Yes o No þ
 Yes o No þ
 Yes þ 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, 2008
 Table of Contents
 Item
    
    
    
    PageNumber
    
    
    
    NumberPart I1.
    
    Business
    
    
    11A.
    
    Risk Factors
    
    
    202.
    
    Properties
    
    
    263.
    
    Legal Proceedings
    
    
    274.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Part II5.
    
    Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    287.
    
    Managements
Discussion and Analysis of Financial Condition and Results of Operations
    
    
    308.
    
    Financial Statements and Supplementary Data
    
    
    579.
    
    Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    579A.
    
    Controls and Procedures
    
    
    579B.
    
    Other Information
    
    
    58Part III10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    5811.
    
    Executive Compensation
    
    
    58




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Item
    
    
    
    PageNumber
    
    
    
    Number12.
    
    Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    5913.
    
    Certain
Relationships and Related Transactions, and Director Independence
    
    
    5914.
    
    Principal Accountant Fees and Services
    
    
    59Part IV15.
    
    Exhibits and Financial Statement Schedules
    
    
    59Signatures
    
    
    63EX-10.3EX-21EX-23EX-31.1EX-31.2EX-32.1EX-32.2




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PART I
 
 ITEM 1. BUSINESS
 Forward-Looking Statements
    
    
    the effects of future economic or business conditions (including in the
residential and commercial real estate construction and development segment of the
economy) nationally and in our local market;
    
    lack of sustained growth in the economy in the Sevier County and Blount County,
Tennessee area;
    
    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;
 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;
    
    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 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
     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;
    
    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
 Borrowings
 7




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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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De novo
  11




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Bank Regulation
      12




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Community Reinvestment Act
    Sarbanes-Oxley Act
  13




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Emergency Economic Stabilization Act
  Payments of Dividends
   14




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Capital
     15




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Regulatory Minimum to beAdequately Capitalized
    
    Company
    
    BankTier 1 capital ratio
    
    
    4.0%
    
    
    
    13.34
    %
    
    
    13.19
    %Total capital ratio
    
    
    8.0%
    
    
    
    14.44
    %
    
    
    14.29
    %Leverage ratio
    
    
    3.0-5.0%
    
    
    
    10.51
    %
    
    
    10.41
    %
 FDICIA
    16




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Enforcement Policies and Actions
  Fiscal and Monetary Policy
  FDIC Insurance Assessments
   17




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18




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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.
  
    
    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.
  19




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Statistical Information
  
 ITEM 1A. RISK FACTORS
 Recent negative developments in the financial services industry and U.S. and global credit markets
may adversely impact the Companys operations and results.
  We have a concentration of credit exposure to borrowers dependent on the tourism industry.
  20




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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.
  Our business is subject to local real estate market and other local economic conditions.
  21




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We are geographically concentrated in Sevier County and Blount County, Tennessee, and changes in
local economic conditions impact our profitability.
   Our continued growth may require the need for additional capital and further regulatory approvals
which, if not obtained, could adversely impact our profitability and implementation of our current
business plan.
  If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will
decrease.
  22




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Competition with other banking institutions could adversely affect our profitability.
  Fluctuations in interest rates could reduce our profitability.
    23




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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.
   Loss of our senior executive officers or other key employees could impair our relationship with our
customers and adversely affect our business.
  Our business is dependent on technology, and an inability to invest in technological improvements
may adversely affect our results of operations and financial condition.
  We are subject to various statutes and regulations that may limit our ability to take certain
actions.
  24




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The enactment of Emergency Economic Stabilization Act of 2008 and the American Recovery and
Reinvestment Act of 2009 may not be able to stabilize the U.S. financial system or the economy and
may significantly affect the Companys financial condition, results of operation or liquidity.
   25




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Stress on the Federal Home Loan Bank system may cause our results of operations and financial
condition to be adversely affected.
  If a change in control or change in management is delayed or prevented, the market price of our
common stock could be negatively affected.
  
 ITEM 2. PROPERTIES
      26




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ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  27




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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 ShareYeart/Period
    
    High
    
    Low2008:
    
    $
    24.46
    
    
    $
    16.20First Quarter
    
    
    23.30
    
    
    
    19.82Second Quarter
    
    
    24.46
    
    
    
    19.81Third Quarter
    
    
    21.53
    
    
    
    18.10Fourth Quarter
    
    
    17.61
    
    
    
    16.202007:
    
    $
    28.57
    
    
    $
    22.00First Quarter
    
    
    26.67
    
    
    
    25.71Second Quarter
    
    
    27.67
    
    
    
    25.71Third Quarter
    
    
    28.57
    
    
    
    27.43Fourth Quarter
    
    
    27.43
    
    
    
    22.00
     28




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Issuer Purchases of Equity Securities
   29




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Total Numberof Shares
    
    
    Approximate DollarPurchased as
    
    
    Value of SharesTotal Number
    
    
    
    
    
    
    Part of Publicly
    
    
    That May Yet Beof Shares
    
    
    Average Price
    
    
    Announced Plans
    
    
    Purchased UnderPurchased
    
    
    Paid per Share
    
    
    or Programs
    
    
    the Plans or ProgramsOctober 1-31, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    859,325November 1-30, 2008
    
    
    31,650
    
    
    
    17.74
    
    
    
    31,650
    
    
    
    297,850December 1-31, 2008
    
    
    17,402
    
    
    
    17.11
    
    
    
    17,402
    
    
    
    Total
    
    
    49,052
    
    
    $
    17.48
    
    
    
    49,052
    
    
    $
    
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
  Overview
  Critical Accounting Policies
  30




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Valuation of Investment Securities
  Allowance and Provision for Loan Losses
  Results of Operations for the Years Ended December 31, 2008 and 2007
 General Discussion of Our Results
  31




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
    
    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.
  Net Income
  32




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Years Ended December 31,
    
    
    Dollar Change
    
    
    Percent Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007Interest income
    
    $
    35,193
    
    
    $
    36,714
    
    
    $
    (1,521
    )
    
    
    -4.14
    %Interest expense
    
    
    16,934
    
    
    
    19,028
    
    
    
    (2,094
    )
    
    
    -11.00
    %Net interest income
    
    
    18,259
    
    
    
    17,686
    
    
    
    573
    
    
    
    3.24
    %Provision for loan losses
    
    
    2,275
    
    
    
    982
    
    
    
    1,293
    
    
    
    131.67
    %Net interest income after
provision for loan losses
    
    
    15,984
    
    
    
    16,704
    
    
    
    (720
    )
    
    
    -4.31
    %Noninterest income
    
    
    4,453
    
    
    
    3,742
    
    
    
    711
    
    
    
    19.00
    %Noninterest expense
    
    
    16,330
    
    
    
    15,240
    
    
    
    1,090
    
    
    
    7.15
    %Net income before
income taxes
    
    
    4,107
    
    
    
    5,206
    
    
    
    (1,099
    )
    
    
    -21.11
    %Income tax expense
    
    
    827
    
    
    
    1,294
    
    
    
    (467
    )
    
    
    -36.09
    %Net income
    
    $
    3,280
    
    
    $
    3,912
    
    
    $
    (632
    )
    
    
    -16.16
    %Total revenues
    
    $
    39,646
    
    
    $
    40,456Total expenses
    
    
    36,366
    
    
    
    36,544Basic earnings per share
    
    
    1.24
    
    
    
    1.68Diluted earnings per share
    
    
    1.24
    
    
    
    1.61
  33




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2008
    
    
    2007First Quarter
    
    $
    790,580
    
    
    $
    901,478Second Quarter
    
    
    929,137
    
    
    
    1,026,037Third Quarter
    
    
    868,204
    
    
    
    1,006,677Fourth Quarter
    
    
    692,287
    
    
    
    977,902Annual Total
    
    $
    3,280,208
    
    
    $
    3,912,094
  34




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Net Interest Income
 Average Balances, Interest Income, and Interest Expense
  35




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Average Balance Sheet and Analysis of Net Interest Income
for the Years Ended December 31, 2008 and 2007  (in thousands, except rates)
 Average Balance
    
    
    Income/Expense
    
    
    Yield/Rate2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Interest-earning assets:Loans (1)(2)
    
    $
    417,124
    
    
    $
    373,237
    
    
    $
    29,921
    
    
    $
    32,267
    
    
    
    7.17
    %
    
    
    8.65
    %Investment Securities: (3)Available for sale
    
    
    101,035
    
    
    
    80,168
    
    
    
    4,917
    
    
    
    3,915
    
    
    
    4.87
    %
    
    
    4.88
    %Held to maturity
    
    
    2,073
    
    
    
    1,916
    
    
    
    96
    
    
    
    92
    
    
    
    4.63
    %
    
    
    4.80
    %Equity securities
    
    
    3,974
    
    
    
    3,187
    
    
    
    210
    
    
    
    186
    
    
    
    5.28
    %
    
    
    5.84
    %Total securities
    
    
    107,082
    
    
    
    85,271
    
    
    
    5,223
    
    
    
    4,193
    
    
    
    4.88
    %
    
    
    4.92
    %Federal funds sold and other
    
    
    2,147
    
    
    
    5,116
    
    
    
    49
    
    
    
    254
    
    
    
    2.28
    %
    
    
    4.96
    %Total interest-earning
assets
    
    
    526,353
    
    
    
    463,624
    
    
    
    35,193
    
    
    
    36,714
    
    
    
    6.69
    %
    
    
    7.92
    %Nonearning assets
    
    
    56,617
    
    
    
    45,361Total Assets
    
    $
    582,970
    
    
    $
    508,985Interest-bearing liabilities:Interest bearing deposits:Interest bearing demand deposits
    
    
    142,020
    
    
    
    127,704
    
    
    
    3,067
    
    
    
    4,949
    
    
    
    2.16
    %
    
    
    3.88
    %Savings deposits
    
    
    13,815
    
    
    
    8,673
    
    
    
    269
    
    
    
    91
    
    
    
    1.95
    %
    
    
    1.05
    %Time deposits
    
    
    224,055
    
    
    
    196,654
    
    
    
    9,579
    
    
    
    10,032
    
    
    
    4.28
    %
    
    
    5.10
    %Total interest bearing deposits
    
    
    379,890
    
    
    
    333,031
    
    
    
    12,915
    
    
    
    15,072
    
    
    
    3.40
    %
    
    
    4.53
    %Securities sold under agreements
to repurchase
    
    
    5,093
    
    
    
    5,815
    
    
    
    129
    
    
    
    158
    
    
    
    2.53
    %
    
    
    2.72
    %Federal Home Loan Bank advances
and other borrowings
    
    
    83,024
    
    
    
    60,970
    
    
    
    3,127
    
    
    
    2,812
    
    
    
    3.77
    %
    
    
    4.61
    %Subordinated debt
    
    
    13,403
    
    
    
    13,403
    
    
    
    763
    
    
    
    986
    
    
    
    5.69
    %
    
    
    7.36
    %Total interest-bearing liabilities
    
    
    481,410
    
    
    
    413,219
    
    
    
    16,934
    
    
    
    19,028
    
    
    
    3.52
    %
    
    
    4.60
    %Noninterest-bearing deposits
    
    
    48,331
    
    
    
    53,336
    
    
    
    
    
    
    
    Total deposits and interest-
bearings liabilities
    
    
    529,741
    
    
    
    466,555
    
    
    
    16,934
    
    
    
    19,028
    
    
    
    3.20
    %
    
    
    4.08
    %Other liabilities
    
    
    2,616
    
    
    
    2,565Shareholders equity
    
    
    50,613
    
    
    
    39,865$
    582,970
    
    
    $
    508,985Net interest income
    
    
    
    
    
    
    
    
    
    $
    18,259
    
    
    $
    17,686Net interest spread (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.17
    %
    
    
    3.32
    %Net interest margin (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.47
    %
    
    
    3.81
    %
  (1)
    
    Interest income from loans includes total fee income of approximately $1,786,000 and $2,138,000
for the years ended December 31, 2008 and 2007, 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. 36




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Rate and Volume Analysis
  37




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ANALYSIS OF CHANGES IN NET INTEREST INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007  (dollars in thousands)
 2008 Compared to 2007Increase (decrease)due to change inRate
    
    
    Volume
    
    
    TotalIncome from interest-earning assets:Interest and fees on loans
    
    $
    (6,142
    )
    
    $
    3,796
    
    
    $
    (2,346
    )Interest on securities
    
    
    (43
    )
    
    
    1,073
    
    
    
    1,030Interest on Federal funds sold and other
    
    
    (58
    )
    
    
    (147
    )
    
    
    (205
    )Total interest income
    
    
    (6,243
    )
    
    
    4,722
    
    
    
    (1,521
    )Expense from interest-bearing liabilities:Interest on interest-bearing deposits
    
    
    (2,424
    )
    
    
    720
    
    
    
    (1,704
    )Interest on time deposits
    
    
    (1,851
    )
    
    
    1,398
    
    
    
    (453
    )Interest on other borrowings
    
    
    (989
    )
    
    
    1,052
    
    
    
    63Total interest expense
    
    
    (5,264
    )
    
    
    3,170
    
    
    
    (2,094
    )Net interest income
    
    $
    (979
    )
    
    $
    1,552
    
    
    $
    573
 Provision for Loan Losses
    38




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Noninterest Income
  Years Ended December 31,
    
    
    Dollar Change
    
    
    Percent Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007Service charges on deposit accounts
    
    $
    1,424
    
    
    $
    1,414
    
    
    $
    10
    
    
    
    0.71
    %Other fees and commissions
    
    
    1,222
    
    
    
    1,153
    
    
    
    69
    
    
    
    5.98
    %Gain on sale of mortgage loans
    
    
    163
    
    
    
    323
    
    
    
    (160
    )
    
    
    -49.54
    %Gain on sale of securities
    
    
    179
    
    
    
    
    
    
    
    179
    
    
    
    100.00
    %Other noninterest income
    
    
    1,465
    
    
    
    852
    
    
    
    613
    
    
    
    71.95
    %Total noninterest income
    
    $
    4,453
    
    
    $
    3,742
    
    
    $
    711
    
    
    
    19.00
    %
  Interest Expense and Net Interest Margin
  39




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Noninterest Expenses
  Years Ended December 31,
    
    
    Dollar Change
    
    
    Percent Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007Salaries and employee benefits
    
    $
    9,232
    
    
    $
    8,992
    
    
    $
    240
    
    
    
    2.67
    %Occupancy expenses
    
    
    1,324
    
    
    
    1,080
    
    
    
    244
    
    
    
    22.59
    %Other operating expenses
    
    
    5,774
    
    
    
    5,167
    
    
    
    607
    
    
    
    11.75
    %Total noninterest expense
    
    $
    16,330
    
    
    $
    15,239
    
    
    $
    1,091
    
    
    
    7.16
    %
  40




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##### Table of Contents



Income Taxes
  Provision for Income Taxes and Effective Tax Rates  (dollars in thousands)
 Provision
    
    Effective Tax Rates2008
    
    $
    827
    
    
    
    20.14
    %2007
    
    
    1,294
    
    
    
    24.86
    %
  41




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##### Table of Contents



Discussion of Financial Condition
 General Discussion of Our Financial Condition
  2008
    
    
    2007
    
    
    $ change
    
    
    % changeCash and equivalents
    
    $
    14,590
    
    
    $
    16,329
    
    
    $
    (1,739
    )
    
    
    -10.65
    %Loans
    
    
    420,429
    
    
    
    397,674
    
    
    
    22,755
    
    
    
    5.72
    %Allowance for loan losses
    
    
    5,292
    
    
    
    3,974
    
    
    
    1,318
    
    
    
    33.17
    %Investment securities
    
    
    126,695
    
    
    
    83,162
    
    
    
    43,533
    
    
    
    52.35
    %Premises and equipment
    
    
    31,484
    
    
    
    25,427
    
    
    
    6,057
    
    
    
    23.82
    %Other real estate owned
    
    
    9,444
    
    
    
    1,329
    
    
    
    8,115
    
    
    
    610.61
    %Total assets
    
    
    621,373
    
    
    
    541,496
    
    
    
    79,877
    
    
    
    14.75
    %Noninterest-bearing demand deposits
    
    
    44,652
    
    
    
    56,307
    
    
    
    (11,655
    )
    
    
    -20.70
    %Interest-bearing demand and savings deposits
    
    
    163,565
    
    
    
    139,319
    
    
    
    24,246
    
    
    
    17.40
    %Time deposits
    
    
    246,449
    
    
    
    208,748
    
    
    
    37,701
    
    
    
    18.06
    %Total deposits
    
    
    454,666
    
    
    
    404,374
    
    
    
    50,292
    
    
    
    12.44
    %Federal funds purchased
    
    
    22,580
    
    
    
    1,300
    
    
    
    21,280
    
    
    
    1636.92
    %Federal Home Loan Bank advances
    
    
    72,900
    
    
    
    65,356
    
    
    
    7,544
    
    
    
    11.54
    %Subordinated debentures
    
    
    13,403
    
    
    
    13,403
    
    
    
    
    
    
    
    0.00
    %Total liabilities
    
    
    570,379
    
    
    
    492,548
    
    
    
    77,831
    
    
    
    15.80
    %Accumulated other comprehensive loss
    
    
    (148
    )
    
    
    (279
    )
    
    
    131
    
    
    
    46.95
    %Total shareholders equity
    
    $
    50,994
    
    
    $
    48,948
    
    
    $
    2,046
    
    
    
    4.18
    %
 Loans
  42




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##### Table of Contents



Loan Portfolio
 At December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004(in thousands)Commercial, financial, agricultural
    
    $
    37,632
    
    
    $
    35,929
    
    
    $
    26,062
    
    
    $
    15,375
    
    
    $
    9,870Real estate  construction, development
    
    
    142,370
    
    
    
    150,844
    
    
    
    137,989
    
    
    
    80,719
    
    
    
    55,618Real estate  mortgage
    
    
    231,999
    
    
    
    201,011
    
    
    
    173,085
    
    
    
    144,898
    
    
    
    134,272Consumer and other
    
    
    8,428
    
    
    
    9,890
    
    
    
    7,572
    
    
    
    7,872
    
    
    
    9,418Less allowance for loan losses
    
    
    5,292
    
    
    
    3,974
    
    
    
    3,524
    
    
    
    2,634
    
    
    
    2,281Loans, net
    
    $
    415,137
    
    
    $
    393,700
    
    
    $
    341,184
    
    
    $
    246,230
    
    
    $
    206,897
  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
    
    $
    14,358
    
    
    $
    8,274
    
    
    $
    7,984
    
    
    $
    7,016Real estate  construction, development
    
    
    101,661
    
    
    
    21,089
    
    
    
    15,622
    
    
    
    3,999Real estate  mortgage
    
    
    97,839
    
    
    
    89,167
    
    
    
    30,855
    
    
    
    14,137Consumer and other
    
    
    5,262
    
    
    
    1,676
    
    
    
    1,234
    
    
    
    256Total
    
    $
    219,120
    
    
    $
    120,206
    
    
    $
    55,695
    
    
    $
    25,408
  Allowance for Loan Losses
  43




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##### Table of Contents



44




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##### Table of Contents



At December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004(in thousands)Loans accounted for on a nonaccrual basis
    
    $
    11,711
    
    
    $
    179
    
    
    $
    
    
    
    $
    92
    
    
    $
    161Loans contractually past due ninety days or more as
to interest or principal payments and still accruing
    
    
    128
    
    
    
    19
    
    
    
    470
    
    
    
    342
    
    
    
    21Loans, 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
    
    
    2,296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loans now current about which there are serious
doubts as to the ability of the borrower to comply
with present loan repayment terms
    
    $
    2,858
    
    
    $
    170
    
    
    $
    30
    
    
    $
    95
    
    
    $
    15
  45




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##### Table of Contents



2008
    
    2007(in thousands)Interest income that would have been recorded on
nonaccrual loans under original terms
    
    $
    748
    
    
    $
    7Interest income that was recorded on nonaccrual
loans
    
    
    2
    
    
    
    41
    46




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##### Table of Contents



At December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004(dollars in thousands)Average balance of loans outstanding
    
    $
    417,124
    
    
    $
    373,237
    
    
    $
    292,950
    
    
    $
    227,910
    
    
    $
    188,481Balance of
allowance for loan losses at beginning of year
    
    
    3,974
    
    
    
    3,524
    
    
    
    2,634
    
    
    
    2,281
    
    
    
    2,142Charge-offs:Commercial, financial, agricultural
    
    
    198
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    Real estate  construction, development
    
    
    686
    
    
    
    158
    
    
    
    1
    
    
    
    24
    
    
    
    Real estate  mortgage
    
    
    41
    
    
    
    250
    
    
    
    25
    
    
    
    40
    
    
    
    325Consumer and other
    
    
    98
    
    
    
    110
    
    
    
    23
    
    
    
    45
    
    
    
    42Recoveries:Commercial, financial, agricultural
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate  construction, development
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    17Real estate  mortgage
    
    
    11
    
    
    
    15
    
    
    
    18
    
    
    
    10
    
    
    
    21Consumer and other
    
    
    12
    
    
    
    14
    
    
    
    5
    
    
    
    6
    
    
    
    Net charge-offs
    
    
    957
    
    
    
    532
    
    
    
    25
    
    
    
    93
    
    
    
    329Additions to allowance charges to operations
    
    
    2,275
    
    
    
    982
    
    
    
    915
    
    
    
    446
    
    
    
    468Balance of allowance for loan losses at end of year
    
    
    5,292
    
    
    
    3,974
    
    
    
    3,524
    
    
    
    2,634
    
    
    
    2,281Ratio of net loan charge-offs during the year to average
loans outstanding during the year
    
    
    0.23
    %
    
    
    0.14
    %
    
    
    0.01
    %
    
    
    0.04
    %
    
    
    0.17
    %
  At December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    LoanCatergory as
    
    
    
    
    
    
    Catergory as
    
    
    
    
    
    
    Catergory as
    
    
    
    
    
    
    Catergory as
    
    
    
    
    
    
    Catergory as% of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans(dollars in thousands)Commercial
    
    $
    1,289
    
    
    
    8.95
    %
    
    $
    968
    
    
    
    9.03
    %
    
    $
    418
    
    
    
    7.56
    %
    
    $
    225
    
    
    
    3.16
    %
    
    $
    226
    
    
    
    4.72
    %Real estate 
construction,
development
    
    
    2,131
    
    
    
    33.86
    %
    
    
    1,600
    
    
    
    37.93
    %
    
    
    1,331
    
    
    
    40.03
    %
    
    
    837
    
    
    
    32.43
    %
    
    
    584
    
    
    
    26.59
    %Real estate  mortgage
    
    
    1,599
    
    
    
    55.18
    %
    
    
    1,201
    
    
    
    50.55
    %
    
    
    1,669
    
    
    
    50.21
    %
    
    
    1,502
    
    
    
    58.23
    %
    
    
    1,411
    
    
    
    64.19
    %Consumer, other
    
    
    273
    
    
    
    2.01
    %
    
    
    205
    
    
    
    2.49
    %
    
    
    106
    
    
    
    2.20
    %
    
    
    70
    
    
    
    6.18
    %
    
    
    60
    
    
    
    4.50
    %Total
    
    $
    5,292
    
    
    
    100.00
    %
    
    $
    3,974
    
    
    
    100.00
    %
    
    $
    3,524
    
    
    
    100.00
    %
    
    $
    2,634
    
    
    
    100.00
    %
    
    $
    2,281
    
    
    
    100.00
    %
 Securities
  47




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##### Table of Contents



At December 31,2008
    
    
    2007
    
    
    2006(in thousands)Securities available for sale:U.S. Treasury and government agencies
and corporations
    
    $
    5,751
    
    
    $
    9,179
    
    
    $
    9,535Corporate securities
    
    
    175
    
    
    
    175
    
    
    
    Mortgage-backed securities
    
    
    98,045
    
    
    
    57,975
    
    
    
    51,367Obligations of states and political subdivisions
    
    
    20,607
    
    
    
    13,812
    
    
    
    13,612Total
    
    
    124,578
    
    
    
    81,141
    
    
    
    74,514Securities held to maturity:Obligations of states and political subdivisions
    
    
    2,117
    
    
    
    2,021
    
    
    
    1,480
  48




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##### Table of Contents



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
    
    $
    5,252
    
    
    
    2.80
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    500
    
    
    
    5.01
    %
    
    $
    5,752
    
    
    
    2.99
    %Corporate securites
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    3.09
    %
    
    
    115
    
    
    
    3.09
    %Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    406
    
    
    
    4.71
    %
    
    
    8,149
    
    
    
    5.08
    %
    
    
    89,489
    
    
    
    5.44
    %
    
    
    98,044
    
    
    
    5.40
    %Obligations of states and
political subdivisions
    
    
    304
    
    
    
    4.53
    %
    
    
    1,108
    
    
    
    4.94
    %
    
    
    3,801
    
    
    
    6.31
    %
    
    
    15,394
    
    
    
    5.86
    %
    
    
    20,607
    
    
    
    5.87
    %Total available for sale
    
    
    5,556
    
    
    
    2.90
    %
    
    
    1,514
    
    
    
    4.88
    %
    
    
    11,950
    
    
    
    5.47
    %
    
    
    105,498
    
    
    
    5.49
    %
    
    
    124,518
    
    
    
    5.37
    %Securities held to maturity:U.S. Treasury and
government agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations of states and
political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    659
    
    
    
    6.56
    %
    
    
    1,458
    
    
    
    4.62
    %
    
    
    2,117
    
    
    
    5.23
    %Total held to maturity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    659
    
    
    
    6.56
    %
    
    
    1,458
    
    
    
    4.62
    %
    
    
    2,117
    
    
    
    5.23
    %Total securities
    
    
    5,556
    
    
    
    2.90
    %
    
    
    1,514
    
    
    
    4.88
    %
    
    
    12,609
    
    
    
    5.53
    %
    
    
    106,956
    
    
    
    5.48
    %
    
    
    126,635
    
    
    
    5.37
    %
  Deposits
   2008
    
    
    2007
    
    
    $ change
    
    
    % changeNoninterest-bearing demand deposits
    
    $
    44,652
    
    
    $
    56,307
    
    
    $
    (11,655
    )
    
    
    -20.70
    %Total noninterest-bearing deposits
    
    
    44,652
    
    
    
    56,307
    
    
    
    (11,655
    )
    
    
    -20.70
    %NOW accounts
    
    
    110,420
    
    
    
    87,380
    
    
    
    23,040
    
    
    
    26.37
    %Money market accounts
    
    
    37,167
    
    
    
    42,959
    
    
    
    (5,792
    )
    
    
    -13.48
    %Savings
    
    
    15,978
    
    
    
    8,980
    
    
    
    6,998
    
    
    
    77.93
    %Brokered deposits
    
    
    62,478
    
    
    
    48,210
    
    
    
    14,268
    
    
    
    29.60
    %Time deposits
    
    
    183,971
    
    
    
    160,538
    
    
    
    23,433
    
    
    
    14.60
    %Total interest-bearing deposits
    
    
    410,014
    
    
    
    348,067
    
    
    
    61,947
    
    
    
    17.80
    %Total deposits
    
    $
    454,666
    
    
    $
    404,374
    
    
    $
    50,292
    
    
    
    12.44
    %
  49




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##### Table of Contents



2008
    
    
    2007
    
    
    2006Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(dollars in thousands)Noninterest-bearing demand deposits
    
    $
    48,331
    
    
    
    0
    %
    
    $
    53,336
    
    
    
    0
    %
    
    $
    54,163
    
    
    
    0
    %Interest-bearing demand deposits
    
    
    142,020
    
    
    
    2.16
    %
    
    
    127,704
    
    
    
    3.88
    %
    
    
    120,268
    
    
    
    3.72
    %Savings deposits
    
    
    13,815
    
    
    
    1.95
    %
    
    
    8,673
    
    
    
    1.05
    %
    
    
    7,860
    
    
    
    0.61
    %Time deposits
    
    
    224,055
    
    
    
    4.28
    %
    
    
    196,654
    
    
    
    5.10
    %
    
    
    146,014
    
    
    
    4.28
    %Total
    
    $
    428,221
    
    
    
    
    
    
    $
    386,367
    
    
    
    
    
    
    $
    328,305
  (dollars in thousands)Three months or less
    
    $
    56,944Over three months through six months
    
    
    49,298Over six months through 12 months
    
    
    47,706Over 12 months
    
    
    18,354Total
    
    $
    172,302
   Shareholders Equity
  50




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##### Table of Contents



Interest Rate Sensitivity Management
      51




---



##### Table of Contents



Analysis of Interest SensitivityAs of December 31, 2008(dollars in thousands)0  3
    
    
    3  12
    
    
    1  3
    
    
    Over threemonths
    
    
    months
    
    
    years
    
    
    years
    
    
    TotalFederal funds sold
    
    $
    576
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    576Securities
    
    
    2,640
    
    
    
    13,063
    
    
    
    20,139
    
    
    
    90,853
    
    
    
    126,695Loans (1)
    
    
    205,596
    
    
    
    75,006
    
    
    
    90,961
    
    
    
    48,866
    
    
    
    420,429Total interest-earning assets
    
    
    208,812
    
    
    
    88,069
    
    
    
    111,100
    
    
    
    139,719
    
    
    
    547,700Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    147,587
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147,587Savings
    
    
    15,978
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,978Time deposits
    
    
    68,480
    
    
    
    143,993
    
    
    
    29,106
    
    
    
    4,870
    
    
    
    246,449Other borrowings
    
    
    36,912
    
    
    
    
    
    
    
    7,700
    
    
    
    55,200
    
    
    
    99,812Total interest-bearing liabilities
    
    
    268,957
    
    
    
    143,993
    
    
    
    36,806
    
    
    
    60,070
    
    
    
    509,826Interest rate sensitivity gap
    
    $
    (60,145
    )
    
    $
    (55,924
    )
    
    $
    74,294
    
    
    $
    79,649
    
    
    $
    37,874Cumulative interest rate
sensitivity gap
    
    $
    (60,145
    )
    
    $
    (116,069
    )
    
    $
    (41,775
    )
    
    $
    37,874Interest rate sensitivity
gap ratio
    
    
    -28.80
    %
    
    
    -63.50
    %
    
    
    66.87
    %
    
    
    57.01
    %Cumulative interest rate
sensitivity gap ratio
    
    
    -28.80
    %
    
    
    -39.10
    %
    
    
    -10.24
    %
    
    
    6.92
    %
 
 (1)
    
    Includes nonaccrual loans  52




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##### Table of Contents



Return on Assets and Equity
  For the Years EndedAt December 31,2008
    
    2007
    
    2006Return on average assets
    
    
    0.56
    %
    
    
    0.77
    %
    
    
    0.95
    %Return on average equity
    
    
    6.48
    %
    
    
    9.81
    %
    
    
    11.26
    %Average equity as a percentage of average assets
    
    
    8.68
    %
    
    
    7.83
    %
    
    
    8.48
    %Cash dividend payout ratio
    
    
    30.65
    %
    
    
    0.00
    %
    
    
    0.00
    %
 Capital Adequacy and Liquidity
   53




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##### Table of Contents



Regulatory Capital Requirements
     December 31, 2008Tier 1 Risk-Based Capital
    
    
    13.34
    %Regulatory minimum
    
    
    4.00
    %Total Risk-Based Capital
    
    
    14.44
    %Regulatory minimum
    
    
    8.00
    %Tier 1 Leverage
    
    
    10.51
    %Regulatory minimum
    
    
    4.00
    %
  December 31, 2008
    
    December 31, 2007Tier 1 Risk-Based Capital
    
    
    13.19
    %
    
    
    13.10
    %Regulatory minimum
    
    
    4.00
    %
    
    
    4.00
    %Well-capitalized
    
    
    6.00
    %
    
    
    6.00
    %Total Risk-Based Capital
    
    
    14.29
    %
    
    
    13.97
    %Regulatory minimum
    
    
    8.00
    %
    
    
    8.00
    %Well-capitalized
    
    
    10.00
    %
    
    
    10.00
    %Tier 1 Leverage
    
    
    10.41
    %
    
    
    11.24
    %Regulatory minimum
    
    
    4.00
    %
    
    
    4.00
    %Well-capitalized
    
    
    5.00
    %
    
    
    5.00
    %
 54




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55




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##### Table of Contents



Off-Balance Sheet Arrangements
  Commitments and Lines of Credit
   2008
    
    
    2007(dollars in thousands)Commitments to extend credit
    
    $
    82,097
    
    
    $
    125,475Standby letters of credit
    
    
    9,885
    
    
    
    5,824Totals
    
    $
    91,982
    
    
    $
    131,299
  Effects of Inflation
   56




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##### Table of Contents



Significant Accounting Changes
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  Managements Annual Report on Internal Control over Financial Reporting
  57




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  58




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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 AND 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 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).
 59




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##### Table of Contents



Exhibit No.
    
    Description of Exhibit3.2
    
    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) (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
    
    Summary Description of Director and Named Executive Officer
Compensation Arrangements*10.4
    
    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)10.5
    
    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)*10.6
    
    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)*10.7
    
    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)*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 Registrant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 Registrants Form 10-K for the year ended December 31,
2007 and incorporated herein by reference)*
 60




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##### 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 Registrant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 Registrant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 Registrant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 Registrants Form 10-K for the year ended December 31,
2007 and incorporated herein by reference)*21
    
    Subsidiaries of the Registrant23
    
    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.  61




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62




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##### Table of Contents



SIGNATURES
  MOUNTAIN NATIONAL BANCSHARES, INC.(Registrant)By:
    
    /s/ Dwight B. Grizzell

Dwight B. GrizzellPresident and Chief Executive OfficerDate: March 31, 2009
  /s/ Dwight B. Grizzell
    
    Date: March 31, 2009Dwight B. Grizzell, President,

Chief Executive Officer and Director/s/ Richard A. Hubbs
    
    Date: March 31, 2009Richard A. Hubbs, Senior Vice President and

Chief Financial Officer (Principal Financial
and Accounting Officer)/s/ James E. Bookstaff
    
    Date: March 31, 2009James E. Bookstaff, Director/s/ Gary A. Helton
    
    Date: March 31, 2009Gary A. Helton, Director/s/ Charlie R. Johnson
    
    Date: March 31, 2009Charlie R. Johnson, Director/s/ Sam L. Large
    
    Date: March 31, 2009Sam L. Large, Director
 63




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##### Table of Contents



/s/ Jeffrey J. Monson
    
    Date: March 31, 2009Jeffrey J. Monson, Director/s/ Linda N. Ogle
    
    Date: March 31, 2009Linda N. Ogle, Director/s/ Michael C. Ownby
    
    Date: March 31, 2009Michael C. Ownby, Director/s/ John M. Parker
    
    Date: March 31, 2009John M. Parker, Director/s/ Ruth Reams
    
    Date: March 31, 2009Ruth Reams, Director
 64




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##### Table of Contents



MOUNTAIN NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
 CONSOLIDATED FINANCIAL REPORT
 DECEMBER 31, 2008




---



##### Table of 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-40




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    
 F-1




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##### Table of Contents



2008
    
    
    2007ASSETSCash and due from banks
    
    $
    14,013,675
    
    
    $
    13,011,580Federal funds sold
    
    
    576,000
    
    
    
    3,317,000Total cash and cash equivalents
    
    
    14,589,675
    
    
    
    16,328,580Securities available for sale
    
    
    124,578,359
    
    
    
    81,140,512Securities held to maturity, fair value
$1,813,410 in 2008 and $2,040,376 in 2007
    
    
    2,117,044
    
    
    
    2,021,327Restricted investments, at cost
    
    
    3,862,518
    
    
    
    3,656,618Loans, net of allowance for loan losses of
$5,292,028 in 2008 and $3,974,354 in 2007
    
    
    415,137,230
    
    
    
    393,699,847Investment in partnership
    
    
    4,117,962
    
    
    
    4,095,085Premises and equipment
    
    
    31,484,233
    
    
    
    25,427,243Accrued interest receivable
    
    
    2,737,819
    
    
    
    2,701,402Cash surrender value of life insurance
    
    
    11,078,708
    
    
    
    8,649,793Other real estate owned
    
    
    9,444,150
    
    
    
    1,328,798Other assets
    
    
    2,225,501
    
    
    
    2,446,821Total assets
    
    $
    621,373,199
    
    
    $
    541,496,026LIABILITIES
AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing demand deposits
    
    $
    44,652,008
    
    
    $
    56,307,457NOW accounts
    
    
    110,420,061
    
    
    
    87,380,047Money market accounts
    
    
    37,166,820
    
    
    
    42,958,868Savings accounts
    
    
    15,977,609
    
    
    
    8,980,122Time deposits
    
    
    246,449,448
    
    
    
    208,747,717Total deposits
    
    
    454,665,946
    
    
    
    404,374,211Federal funds purchased
    
    
    22,580,000
    
    
    
    1,300,000Securities sold under agreements to repurchase
    
    
    4,331,865
    
    
    
    5,441,515Accrued interest payable
    
    
    1,022,921
    
    
    
    1,240,117Subordinated debentures
    
    
    13,403,000
    
    
    
    13,403,000Federal Home Loan Bank advances
    
    
    72,900,000
    
    
    
    65,356,418Other liabilities
    
    
    1,475,714
    
    
    
    1,432,312Total liabilities
    
    
    570,379,446
    
    
    
    492,547,573Commitments and contingenciesShareholders equity:Common stock, $1.00 par value; 10,000,000
shares authorized; issued and outstanding
2,631,611 shares at December 31, 2008 and
2,499,629 shares at December 31, 2007
    
    
    2,631,611
    
    
    
    2,499,629Additional paid-in capital
    
    
    41,952,632
    
    
    
    39,426,881Retained earnings
    
    
    6,557,097
    
    
    
    7,300,933Accumulated other comprehensive income
(loss)
    
    
    (147,587
    )
    
    
    (278,990
    )Total shareholders equity
    
    
    50,993,753
    
    
    
    48,948,453Total liabilities and shareholders equity
    
    $
    621,373,199
    
    
    $
    541,496,026
  F-2




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##### Table of Contents



2008
    
    
    2007INTEREST INCOMELoans
    
    $
    29,920,558
    
    
    $
    32,267,281Taxable securities
    
    
    4,434,395
    
    
    
    3,575,785Tax-exempt securities
    
    
    788,792
    
    
    
    616,277Federal funds sold and deposits in other banks
    
    
    49,246
    
    
    
    254,274Total interest income
    
    
    35,192,991
    
    
    
    36,713,617INTEREST EXPENSEDeposits
    
    
    12,914,535
    
    
    
    15,071,725Federal funds purchased
    
    
    314,216
    
    
    
    213,222Repurchase agreements
    
    
    129,080
    
    
    
    157,734Federal Home Loan Bank advances
    
    
    2,813,163
    
    
    
    2,599,215Subordinated debentures
    
    
    763,196
    
    
    
    986,037Total interest expense
    
    
    16,934,190
    
    
    
    19,027,933Net interest income
    
    
    18,258,801
    
    
    
    17,685,684Provision for loan losses
    
    
    2,275,000
    
    
    
    981,900Net interest income after provision for loan losses
    
    
    15,983,801
    
    
    
    16,703,784NONINTEREST INCOMEService charges on deposit accounts
    
    
    1,424,062
    
    
    
    1,414,005Other fees and commissions
    
    
    1,222,454
    
    
    
    1,152,851Gain on sale of mortgage loans
    
    
    162,740
    
    
    
    322,906Gain on sale of securities available for sale, net
    
    
    179,274
    
    
    
    Other noninterest income
    
    
    1,464,867
    
    
    
    852,381Total noninterest income
    
    
    4,453,397
    
    
    
    3,742,143NONINTEREST EXPENSESalaries and employee benefits
    
    
    9,232,079
    
    
    
    8,992,172Occupancy expenses
    
    
    1,323,860
    
    
    
    1,080,632Other operating expenses
    
    
    5,774,264
    
    
    
    5,166,693Total noninterest expense
    
    
    16,330,203
    
    
    
    15,239,497Income before income taxes
    
    
    4,106,995
    
    
    
    5,206,430Income taxes
    
    
    826,787
    
    
    
    1,294,336Net income
    
    $
    3,280,208
    
    
    $
    3,912,094EARNINGS PER SHAREBasic
    
    $
    1.24
    
    
    $
    1.68Diluted
    
    $
    1.24
    
    
    $
    1.61
  F-3




---



##### Table of Contents



AccumulatedAdditional
    
    
    
    
    
    Other
    
    TotalComprehensive
    
    Common
    
    Paid-in
    
    Retained
    
    Comprehensive
    
    ShareholdersIncome
    
    Stock
    
    Capital
    
    Earnings
    
    Income/(Loss)
    
    EquityBALANCE, January 1, 2007
    
    
    
    
    
    $
    1,943,428
    
    
    $
    27,096,848
    
    
    $
    6,068,324
    
    
    $
    (697,737
    )
    
    
    34,410,863Exercise of stock options, 32,216 shares
    
    
    
    
    
    
    32,216
    
    
    
    276,473
    
    
    
    
    
    
    
    
    
    
    
    308,689Exercise of stock warrants, 437,896 shares
    
    
    
    
    
    
    437,896
    
    
    
    9,578,237
    
    
    
    
    
    
    
    
    
    
    
    10,016,133Share repurchase program, 10,272 shares
    
    
    
    
    
    
    (10,272
    )
    
    
    (289,967
    )
    
    
    
    
    
    
    
    
    
    
    (300,239
    )5% stock dividend
    
    
    
    
    
    
    96,361
    
    
    
    2,553,567
    
    
    
    (2,679,485
    )
    
    
    
    
    
    
    (29,557
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    138,596
    
    
    
    
    
    
    
    
    
    
    
    138,596Tax benefit from exercise of options
    
    
    
    
    
    
    
    
    
    
    73,127
    
    
    
    
    
    
    
    
    
    
    
    73,127Comprehensive income:Net income
    
    $
    3,912,094
    
    
    
    
    
    
    
    
    
    
    
    3,912,094
    
    
    
    
    
    
    
    3,912,094Other comprehensive income, net of tax:Unrealized holding gain on
securities available for sale, net
of reclassification adjustment
    
    
    418,747
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    418,747
    
    
    
    418,747Total comprehensive income
    
    
    4,330,841BALANCE, December 31, 2007
    
    
    
    
    
    
    2,499,629
    
    
    
    39,426,881
    
    
    
    7,300,933
    
    
    
    (278,990
    )
    
    
    48,948,453Exercise of stock options, 72,914 shares
    
    
    
    
    
    
    72,914
    
    
    
    504,716
    
    
    
    
    
    
    
    
    
    
    
    577,630Share repurchase program, 65,650 shares
    
    
    
    
    
    
    (65,650
    )
    
    
    (1,136,372
    )
    
    
    
    
    
    
    
    
    
    
    (1,202,022
    )5% stock dividend
    
    
    
    
    
    
    124,718
    
    
    
    2,868,514
    
    
    
    (3,011,034
    )
    
    
    
    
    
    
    (17,802
    )Cash dividend ($0.38 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,013,010
    )
    
    
    
    
    
    
    (1,013,010
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    86,000
    
    
    
    
    
    
    
    
    
    
    
    86,000Tax benefit from exercise of options
    
    
    
    
    
    
    
    
    
    
    202,893
    
    
    
    
    
    
    
    
    
    
    
    202,893Comprehensive income:Net income
    
    
    3,280,208
    
    
    
    
    
    
    
    
    
    
    
    3,280,208
    
    
    
    
    
    
    
    3,280,208Other comprehensive income, net of tax:Unrealized holding gain on
securities available for sale, net
of reclassification adjustment
    
    
    131,403
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131,403
    
    
    
    131,403Total comprehensive income
    
    $
    3,411,611BALANCE, December 31, 2008
    
    
    
    
    
    $
    2,631,611
    
    
    $
    41,952,632
    
    
    $
    6,557,097
    
    
    $
    (147,587
    )
    
    $
    50,993,753
  F-4




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##### Table of Contents



2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    3,280,208
    
    
    $
    3,912,094Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,248,204
    
    
    
    1,058,203Net realized gains on securities available for sale
    
    
    (179,274
    )
    
    
    Net amortization on securities
    
    
    124,466
    
    
    
    148,110Activity in held-to-maturity securities:Increase due to accretion
    
    
    (95,717
    )
    
    
    (92,419
    )Provision for loan losses
    
    
    2,275,000
    
    
    
    981,900(Gain)/loss on sale of other real estate
    
    
    62,120
    
    
    
    (271,614
    )Gain on sale of land
    
    
    (821,096
    )
    
    
    Deferred income taxes
    
    
    (611,624
    )
    
    
    (460,168
    )Gross mortgage loans originated for sale
    
    
    (19,015,218
    )
    
    
    (33,096,725
    )Gross proceeds from sale of mortgage loans
    
    
    19,381,754
    
    
    
    34,585,892Gain on sale of mortgage loans
    
    
    (162,740
    )
    
    
    (322,906
    )Increase in cash surrender value of life insurance
    
    
    (428,915
    )
    
    
    (335,625
    )Investment in partnership
    
    
    (22,877
    )
    
    
    (1,857
    )Share-based compensation
    
    
    86,000
    
    
    
    138,596Tax benefit from exercise of options
    
    
    (202,893
    )
    
    
    (73,127
    )Change in operating assets and liabilities:Accrued interest receivable
    
    
    (36,417
    )
    
    
    (63,183
    )Accrued interest payable
    
    
    (217,196
    )
    
    
    283,893Other assets and liabilities
    
    
    929,901
    
    
    
    (2,283,894
    )Net cash provided by operating activities
    
    
    5,593,686
    
    
    
    4,107,170CASH FLOWS FROM INVESTING ACTIVITIESActivity in available-for-sale securities:Proceeds from sales, maturities, and calls
    
    
    44,204,574
    
    
    
    17,602,342Purchases
    
    
    (87,456,210
    )
    
    
    (23,783,142
    )Activity in held-to-maturity securities:Purchases
    
    
    
    
    
    
    (449,288
    )Purchases of other investments
    
    
    (205,900
    )
    
    
    (1,210,451
    )Loan originations and principal collections, net
    
    
    (32,618,031
    )
    
    
    (54,663,567
    )Purchase of premises and equipment
    
    
    (7,802,054
    )
    
    
    (6,540,962
    )Proceeds from sale of land
    
    
    1,317,955
    
    
    
    Purchase of life insurance
    
    
    (2,000,000
    )
    
    
    Proceeds from sale of other real estate
    
    
    673,719
    
    
    
    1,204,893Net cash used in investing activities
    
    
    (83,885,947
    )
    
    
    (67,840,175
    )CASH FLOWS FROM FINANCING ACTIVITIESNet increase in deposits
    
    
    50,291,735
    
    
    
    42,644,918Proceeds from Federal Home Loan Bank advances
    
    
    27,000,000
    
    
    
    60,000,000Matured Federal Home Loan Bank advances
    
    
    (19,456,418
    )
    
    
    (31,353,794
    )Net increase/(decrease) in federal funds purchased
    
    
    21,280,000
    
    
    
    (14,275,000
    )Net decrease in securities sold under
agreements to repurchase
    
    
    (1,109,650
    )
    
    
    (418,871
    )Proceeds
from issuance of common stock, including warrants and options
    
    
    577,630
    
    
    
    10,324,822Tax benefit from exercise of options
    
    
    202,893
    
    
    
    73,127Purchase of common stock
    
    
    (1,202,022
    )
    
    
    (300,239
    )Cash dividends
    
    
    (1,030,812
    )
    
    
    (29,557
    )Net cash provided by financing activities
    
    
    76,553,356
    
    
    
    66,665,406NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,738,905
    )
    
    
    2,932,401CASH AND CASH EQUIVALENTS, beginning of year
    
    
    16,328,580
    
    
    
    13,396,179CASH AND CASH EQUIVALENTS, end of year
    
    $
    14,589,675
    
    
    $
    16,328,580SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for:Interest
    
    $
    17,151,386
    
    
    $
    18,744,040Income taxes
    
    
    1,165,000
    
    
    
    1,450,000Non-cash investing and financing activities:Transfers from loans to other real estate owned
    
    
    8,701,852
    
    
    
    1,843,467
  F-5




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F-6




---



##### Table of Contents



F-7




---



##### Table of Contents



F-8




---



##### Table of Contents



Accounting by Creditors for Impairment of a Loan,
     F-9




---



##### Table of Contents



F-10




---



##### Table of Contents



Accounting for Uncertainty in Income Taxes
           F-11




---



##### Table of Contents



F-12




---



##### Table of Contents



Disclosures about Segments of an Enterprise and Related Information
   F-13




---



##### Table of Contents



2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U. S. Government
securities
    
    $
    254,253
    
    
    $
    2,545
    
    
    $
    
    
    
    $
    256,798U. S. Government
agencies
    
    
    5,453,229
    
    
    
    42,086
    
    
    
    
    
    
    
    5,495,315Obligations of states and
political subdivisions
    
    
    22,224,441
    
    
    
    21,075
    
    
    
    (1,638,780
    )
    
    
    20,606,736Corporate securities
    
    
    175,000
    
    
    
    
    
    
    
    (60,147
    )
    
    
    114,853Mortgage-backed
securities
    
    
    96,720,773
    
    
    
    1,435,106
    
    
    
    (51,222
    )
    
    
    98,104,657$
    124,827,696
    
    
    $
    1,500,812
    
    
    $
    (1,750,149
    )
    
    $
    124,578,359Securities held to maturity:Obligations of states and
political subdivisions
    
    $
    2,117,044
    
    
    $
    
    
    
    $
    (303,634
    )
    
    $
    1,813,410
 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U. S. Government
securities
    
    $
    247,708
    
    
    $
    1,902
    
    
    $
    
    
    
    $
    249,610U. S. Government
agencies
    
    
    8,880,411
    
    
    
    48,892
    
    
    
    (592
    )
    
    
    8,928,711Obligations of states and
political subdivisions
    
    
    13,833,607
    
    
    
    42,239
    
    
    
    (64,000)
    
    
    
    13,811,846Corporate securities
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    
    175,000Mortgage-backed
securities
    
    
    58,451,192
    
    
    
    183,853
    
    
    
    (659,700)
    
    
    
    57,975,345$
    81,587,918
    
    
    $
    276,886
    
    
    $
    (724,292)
    
    
    $
    81,140,512Securities held to maturity:Obligations of states and
political subdivisions
    
    $
    2,021,327
    
    
    $
    34,490
    
    
    $
    (15,441)
    
    
    $
    2,040,376
 F-14




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##### Table of Contents



December 31, 2008:
 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
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    U. S. Government
agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    Obligations of states and
political subdivisions
    
    
    18,671,408
    
    
    
    (1,787,779
    )
    
    
    985,140
    
    
    
    (154,636
    )
    
    $
    19,656,548
    
    
    $
    (1,942,415
    )Corporate securities
    
    
    114,853
    
    
    
    (60,147
    )
    
    
    
    
    
    
    
    
    
    $
    114,853
    
    
    $
    (60,147
    )Mortgage-backed
securities
    
    
    6,008,515
    
    
    
    (37,907
    )
    
    
    3,781,650
    
    
    
    (13,314
    )
    
    $
    9,790,165
    
    
    $
    (51,221
    )Total temporarily impaired
    
    $
    24,794,776
    
    
    $
    (1,885,833
    )
    
    $
    4,766,790
    
    
    $
    (167,950
    )
    
    $
    29,561,566
    
    
    $
    (2,053,783
    )
 December 31, 2007:
 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
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    U. S. Government
agencies
    
    
    
    
    
    
    
    
    
    
    998,440
    
    
    
    (592
    )
    
    $
    998,440
    
    
    $
    (592
    )Obligations of states and
political subdivisions
    
    
    4,406,227
    
    
    
    (59,279
    )
    
    
    1,595,476
    
    
    
    (20,162
    )
    
    $
    6,001,703
    
    
    $
    (79,441
    )Mortgage-backed
securities
    
    
    3,009,017
    
    
    
    (30,117
    )
    
    
    30,736,827
    
    
    
    (629,583
    )
    
    $
    33,745,844
    
    
    $
    (659,700
    )Total temporarily impaired
    
    $
    7,415,244
    
    
    $
    (89,396
    )
    
    $
    33,330,743
    
    
    $
    (650,337
    )
    
    $
    40,745,987
    
    
    $
    (739,733
    )
  F-15




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##### Table of Contents



The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments
   Securities Available for Sale
    
    
    Securities Held to MaturityAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueDue in one year or less
    
    $
    5,508,619
    
    
    $
    5,556,138
    
    
    $
    
    
    
    $
    Due more than one year
through five years
    
    
    1,101,036
    
    
    
    1,107,642
    
    
    
    
    
    
    
    Due more than five years
through ten years
    
    
    3,942,166
    
    
    
    3,801,101
    
    
    
    658,660
    
    
    
    581,920Due after ten years
    
    
    17,555,102
    
    
    
    16,008,821
    
    
    
    1,458,384
    
    
    
    1,231,490Mortgage-backed
securities
    
    
    96,720,773
    
    
    
    98,104,657
    
    
    
    
    
    
    
    $
    124,827,696
    
    
    $
    124,578,359
    
    
    $
    2,117,044
    
    
    $
    1,813,410
 F-16




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##### Table of Contents



2008
    
    
    2007Mortgage loans on real estate:Residential 1-4 family
    
    $
    75,921,024
    
    
    $
    57,539,569Residential multifamily
    
    
    6,587,643
    
    
    
    4,554,549Commercial
    
    
    113,734,280
    
    
    
    107,652,176Construction
    
    
    142,369,956
    
    
    
    150,843,738Second mortgages
    
    
    6,058,854
    
    
    
    4,712,743Equity lines of credit
    
    
    29,697,498
    
    
    
    26,551,874374,369,255
    
    
    
    351,854,649Commercial loans
    
    
    37,631,830
    
    
    
    35,929,294Consumer installment loans:Personal
    
    
    6,233,261
    
    
    
    7,863,684Credit cards
    
    
    2,194,912
    
    
    
    2,026,5748,428,173
    
    
    
    9,890,258Total loans
    
    
    420,429,258
    
    
    
    397,674,201Less: Allowance for loan losses
    
    
    (5,292,028
    )
    
    
    (3,974,354
    )Loans, net
    
    $
    415,137,230
    
    
    $
    393,699,847
 F-17




---



##### Table of Contents



2008
    
    
    2007Balance, beginning of year
    
    $
    3,974,354
    
    
    $
    3,524,374Provision for loan losses
    
    
    2,275,000
    
    
    
    981,900Loans charged-off
    
    
    (1,023,366
    )
    
    
    (561,315
    )Recoveries of loans previously charged-off
    
    
    66,040
    
    
    
    29,395Balance, end of year
    
    $
    5,292,028
    
    
    $
    3,974,354
    2008
    
    2007Year-end loans with allocated allowance
for loan losses
    
    $
    2,807,562
    
    
    $
    368,164Year-end loans with no allocated allowance
for loan losses
    
    
    539,263
    
    
    
    877,166Allowance for loan losses on impaired
loans
    
    
    561,250
    
    
    
    222,691Average of individually impaired loans
during the year
    
    
    4,600,602
    
    
    
    625,973
  2008
    
    2007Loans past due over 90 days still on accrual
    
    $
    128,620
    
    
    $
    18,806Nonaccrual loans
    
    
    11,711,449
    
    
    
    178,579
 F-18




---



##### Table of Contents



2008
    
    
    2007Land
    
    $
    9,047,710
    
    
    $
    9,424,151Buildings and improvements
    
    
    21,154,187
    
    
    
    14,919,662Furniture, fixtures and equipment
    
    
    7,585,050
    
    
    
    6,136,61237,786,947
    
    
    
    30,480,425Accumulated depreciation
    
    
    (6,302,714
    )
    
    
    (5,053,182
    )$
    31,484,233
    
    
    $
    25,427,243
     F-19




---



##### Table of Contents



2009
    
    $
    213,097,0002010
    
    
    23,887,5742011
    
    
    4,600,2272012
    
    
    4,461,8462013
    
    
    402,801Total
    
    $
    246,449,448
    2008
    
    
    2007Current tax expense
    
    $
    1,438,411
    
    
    $
    1,754,504Deferred tax expense (benefit)
    
    
    (611,624
    )
    
    
    (460,168
    )Income tax expense
    
    $
    826,787
    
    
    $
    1,294,336
  2008
    
    
    2007Expected tax at statutory rates
    
    $
    1,396,000
    
    
    $
    1,770,000Increase (decrease) resulting from tax effect of:State income taxes, net of federal tax
    
    
    (90,328
    )
    
    
    (94,889
    )Increase in cash surrender value of life insurance
    
    
    (145,831
    )
    
    
    (114,113
    )Tax exempt interest
    
    
    (258,597
    )
    
    
    (200,153
    )General business credits, net of basis reduction
    
    
    (132,000
    )
    
    
    (132,000
    )Other
    
    
    57,543
    
    
    
    65,491Income tax expense
    
    $
    826,787
    
    
    $
    1,294,336
 F-20




---



##### Table of Contents



2008
    
    
    2007Deferred tax assets:Allowance for loan losses
    
    $
    1,779,980
    
    
    $
    1,254,945Deferred compensation
    
    
    303,785
    
    
    
    203,238Unrealized loss on securities available for sale
    
    
    101,750
    
    
    
    168,417Net operating loss
    
    
    199,477
    
    
    
    138,250Other
    
    
    265,017
    
    
    
    114,046Total deferred tax assets
    
    
    2,650,009
    
    
    
    1,878,896Deferred tax liabilities:Accelerated depreciation
    
    
    (619,000
    )
    
    
    (371,932
    )Income from subsidiary
    
    
    (46,973
    )
    
    
    (225,682
    )Investment in partnership
    
    
    (204,000
    )
    
    
    (136,227
    )Other
    
    
    (208,745
    )
    
    
    (118,721
    )Total deferred tax liabilities
    
    
    (1,078,718
    )
    
    
    (852,562
    )Total net deferred tax assets
    
    $
    1,571,291
    
    
    $
    1,026,334
    F-21




---



##### Table of Contents



2008
    
    
    2007Short-term advance requiring monthly interest payments
at 0.54% variable, principal due in February 2009
    
    $
    10,000,000
    
    
    $
    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
    
    
    
    
    
    
    3,000,000Long-term advance requiring monthly principal and interest
payments at 4.20% fixed, remaining principal due in July 2008
    
    
    
    
    
    
    1,756,418Long-term advance requiring monthly interest payments
at 4.15% fixed, principal due in June 2008
    
    
    
    
    
    
    2,500,000Long-term advance requiring monthly interest payments
at 4.12% fixed, principal due in June 2008
    
    
    
    
    
    
    200,000Long-term callable advance requiring monthly interest payments
at 4.39% fixed, principal due in November 2011
    
    
    7,500,000
    
    
    
    7,500,000Long-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
    
    
    
    10,000,000
 F-22




---



##### Table of Contents



2008
    
    
    2007Long-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
    
    
    
    $
    72,900,000
    
    
    $
    65,356,418
    F-23




---



##### Table of Contents



2008
    
    2007Weighted average borrowing rate at year-end
    
    
    2.20
    %
    
    
    2.72
    %Weighted average borrowing rate during the year
    
    
    2.53
    %
    
    
    2.71
    %Average daily balance during the year
    
    $
    5,093,472
    
    
    $
    5,815,161Maximum month-end balance during the year
    
    
    7,413,995
    
    
    
    8,602,461Balance at year-end
    
    $
    4,331,865
    
    
    $
    5,441,515
 F-24




---



##### Table of Contents



F-25




---



##### Table of Contents



2009
    
    $
    167,7182010
    
    
    129,1492011
    
    
    101,7452012
    
    
    103,3692013
    
    
    78,270Thereafter
    
    
    Total
    
    $
    580,251
     F-26




---



##### Table of Contents



Fair Value Measurements
       F-27




---



##### Table of Contents



Assets and Liabilities Measured on a Recurring Basis
  FairValue Measurementsat December 31, 2008 UsingSignificantOther ObservableInputs(Level 2)Assets:Available for sale securities
    
    $
    124,578,359
 Assets and Liabilities Measured on a Non-Recurring Basis
  Fair Value Measurementsat December 31, 2008 UsingSignificantUnobservableInputs(Level 3)Assets:Impaired loans
    
    $
    2,246,312
 F-28




---



##### Table of Contents



Fair Value of Financial Instruments
           F-29




---



##### Table of Contents



F-30




---



##### Table of Contents



2008
    
    2007Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    14,590
    
    
    $
    14,590
    
    
    $
    16,329
    
    
    $
    16,329Investment securities held to maturity
    
    
    2,117
    
    
    
    1,813
    
    
    
    2,021
    
    
    
    2,040Restricted investments
    
    
    3,863
    
    
    
    N/A
    
    
    
    3,657
    
    
    
    N/ALoans, net
    
    
    412,891
    
    
    
    415,723
    
    
    
    393,700
    
    
    
    393,117Accrued interest receivable
    
    
    2,738
    
    
    
    2,738
    
    
    
    2,701
    
    
    
    2,701Liabilities:Noninterest-bearing demand deposits
    
    $
    44,652
    
    
    $
    44,652
    
    
    $
    56,307
    
    
    $
    56,307NOW accounts
    
    
    110,420
    
    
    
    110,420
    
    
    
    87,380
    
    
    
    87,380Savings and money market accounts
    
    
    53,144
    
    
    
    53,144
    
    
    
    51,939
    
    
    
    51,939Time deposits
    
    
    246,449
    
    
    
    248,356
    
    
    
    208,748
    
    
    
    210,089Subordinated debentures
    
    
    13,403
    
    
    
    10,582
    
    
    
    13,403
    
    
    
    14,356Federal funds purchased and securities
sold under agreements to repurchase
    
    
    26,912
    
    
    
    26,912
    
    
    
    6,742
    
    
    
    6,742Federal Home Loan Bank advances
    
    
    72,900
    
    
    
    80,517
    
    
    
    65,356
    
    
    
    67,435Accrued interest payable
    
    
    1,023
    
    
    
    1,023
    
    
    
    1,240
    
    
    
    1,240
   F-31




---



##### Table of Contents



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
    
    
    121,717
    
    
    $
    21.64
    
    
    
    381,689Equity compensation plans not
approved by security holders
    
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    Weighted AverageNumber
    
    
    Average
    
    
    Remaining
    
    
    Aggregateof Options
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOptions outstanding, December 31, 2007
    
    
    191,831
    
    
    $
    16.89Options granted
    
    
    9,646
    
    
    
    20.41Options exercised
    
    
    (72,914
    )
    
    
    7.92Options forfeited
    
    
    (6,846
    )
    
    
    22.15Options outstanding, December 31, 2008
    
    
    121,717
    
    
    $
    21.64
    
    
    
    7.04
    
    
    $
    Exercisable at December 31, 2008
    
    
    50,277
    
    
    $
    16.58
    
    
    
    5.61
    
    
    $
    112,332
  F-32




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##### Table of Contents



2008
    
    2007Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected life
    
    9.5 years
    
    7.2 yearsExpected volatility
    
    
    18
    %
    
    
    19
    %Risk-free interest rate
    
    
    3.60
    %
    
    
    4.61
    %
    F-33




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##### Table of Contents



For CapitalActual
    
    Adequacy Purposes
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2008:Total capital to risk-weighted assets:Consolidated
    
    $
    69,433
    
    
    
    14.44
    %
    
    $
    38,471
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    68,725
    
    
    
    14.29
    %
    
    
    38,462
    
    
    
    8.00
    %
    
    
    48,078
    
    
    
    10.00
    %Tier I capital to risk-weighted assets:Consolidated
    
    
    64,142
    
    
    
    13.34
    %
    
    
    19,236
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    63,433
    
    
    
    13.19
    %
    
    
    19,231
    
    
    
    4.00
    %
    
    
    28,847
    
    
    
    6.00
    %Tier I capital to average assets:Consolidated
    
    
    64,142
    
    
    
    10.51
    %
    
    
    24,403
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    63,433
    
    
    
    10.41
    %
    
    
    24,375
    
    
    
    4.00
    %
    
    
    30,469
    
    
    
    5.00
    %As of December 31, 2007:Total capital to risk-weighted assets:Mountain National Bank
    
    
    63,777
    
    
    
    13.97
    %
    
    
    36,531
    
    
    
    8.00
    %
    
    
    45,663
    
    
    
    10.00
    %Tier I capital to risk-weighted assets:Mountain National Bank
    
    
    59,803
    
    
    
    13.10
    %
    
    
    18,265
    
    
    
    4.00
    %
    
    
    27,398
    
    
    
    6.00
    %Tier I capital to average assets:Mountain National Bank
    
    
    59,803
    
    
    
    11.24
    %
    
    
    21,288
    
    
    
    4.00
    %
    
    
    26,610
    
    
    
    5.00
    %
 F-34




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##### Table of Contents



TaxBefore-Tax
    
    
    (Expense)
    
    
    Net-of-TaxAmount
    
    
    Benefit
    
    
    AmountYear ended December 31, 2008:Unrealized holding gains/(losses)
arising during the period
    
    $
    377,344
    
    
    $
    (134,791
    )
    
    $
    242,553Less reclassification adjustment for
gains realized in net income
    
    
    (179,274
    )
    
    
    68,124
    
    
    
    (111,150
    )$
    198,070
    
    
    $
    (66,667
    )
    
    $
    131,403Year ended December 31, 2007:Unrealized holding gains/(losses)
arising during the period
    
    $
    510,480
    
    
    $
    (91,733
    )
    
    $
    418,747Less reclassification adjustment for
gains realized in net income
    
    
    
    
    
    
    
    
    
    
    Mountain National Bank
    
    $
    510,480
    
    
    $
    (91,733
    )
    
    $
    418,747
 F-35




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##### Table of Contents



2008
    
    
    2007Net income applicable to common stock
    
    $
    3,280,208
    
    
    $
    3,912,094Average number of common shares outstanding
    
    
    2,634,750
    
    
    
    2,331,396Dilutive effect of stock options
    
    
    7,195
    
    
    
    64,696Dilutive effect of warrants
    
    
    
    
    
    
    39,868Average number of common shares outstanding used
to calculate diluted earnings per common share
    
    
    2,641,945
    
    
    
    2,435,960
   Effective Date of FASB Statement
No. 157. Determining the Fair Value of a Financial Asset when the Market for That Asset Is Not
Active.
 F-36




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##### Table of Contents



The Fair Value Option for Financial Assets and
Financial Liabilities
 Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements
 Written Loan Commitments Recorded at Fair Value through Earnings Application of Accounting Principles to Loan Commitments
 Share-Based Payment
 F-37




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##### Table of Contents



Business Combinations
 Noncontrolling Interest in Consolidated Financial
Statements, an amendment of ARB No. 51
 Disclosures about Derivative Instruments and Hedging
Activities, an amendment of SFAS No. 133
    F-38




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##### Table of Contents



BALANCE SHEETS
 December 31,2008
    
    
    2007ASSETSCash
    
    $
    463,884
    
    
    $
    2,183,860Investment in subsidiary
    
    
    63,285,236
    
    
    
    59,524,171Other assets
    
    
    774,465
    
    
    
    775,687Total assets
    
    $
    64,523,585
    
    
    $
    62,483,718LIABILITIES AND SHAREHOLDERS EQUITYSubordinated debentures
    
    $
    13,403,000
    
    
    $
    13,403,000Accrued interest payable
    
    
    126,832
    
    
    
    132,265Total liabilities
    
    
    13,529,832
    
    
    
    13,535,265Shareholders equity
    
    
    50,993,753
    
    
    
    48,948,453Total liabilities and shareholders equity
    
    $
    64,523,585
    
    
    $
    62,483,718
 STATEMENTS OF INCOME
 December 31,2008
    
    
    2007Dividends from subsidiaries
    
    $
    500,000
    
    
    $
    Interest expense
    
    
    763,196
    
    
    
    986,037Other expense
    
    
    145,184
    
    
    
    131,953Loss before equity in undistributed earnings of subsidiary
    
    
    (408,380
    )
    
    
    (1,117,990
    )Equity in undistributed earnings of subsidiary
    
    
    3,340,769
    
    
    
    4,595,663Income tax benefit
    
    
    347,819
    
    
    
    434,421Net income
    
    $
    3,280,208
    
    
    $
    3,912,094
 F-39




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##### Table of Contents



STATEMENTS OF CASH FLOWS
 December 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    3,280,208
    
    
    $
    3,912,094Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiary
    
    
    (3,340,769
    )
    
    
    (4,595,663
    )Other
    
    
    (4,211
    )
    
    
    (127,423
    )Net cash used in operating activities
    
    
    (64,772
    )
    
    
    (810,992
    )CASH FLOWS FROM INVESTING ACTIVITIESPayments for investments in and advances to subsidiaries
    
    
    
    
    
    
    (10,000,000
    )Net cash used in investing activities
    
    
    
    
    
    
    (10,000,000
    )CASH FLOWS FROM FINANCING ACTIVITIESDividends
    
    
    (1,030,812
    )
    
    
    (29,557
    )Proceeds from issuance of common stock
    
    
    577,630
    
    
    
    10,324,822Purchase of common stock
    
    
    (1,202,022
    )
    
    
    (300,239
    )Net cash (used)/provided by financing activities
    
    
    (1,655,204
    )
    
    
    9,995,026NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,719,976
    )
    
    
    (815,966
    )CASH AND CASH EQUIVALENTS, beginning of year
    
    
    2,183,860
    
    
    
    2,999,826CASH AND CASH EQUIVALENTS, end of year
    
    $
    463,884
    
    
    $
    2,183,860SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid (received) during the year for:Interest
    
    $
    768,630
    
    
    $
    988,574Income taxes
    
    
    (295,042
    )
    
    
    (272,133
    )
 F-40