##### Table of Contents



UNITED
STATESSECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-KSB
 (Mark One)
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from
 to
 Commission file number: 0-49912
 MOUNTAIN NATIONAL BANCSHARES, INC.
  Tennessee
    
    75-3036312(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)
 300 East Main, Sevierville, Tennessee
    
    37862(Address of principal executive offices)
    
    (Zip code)
 (865) 428-7990
    þ
 þ o
 o
 o þ
    DOCUMENTS INCORPORATED BY REFERENCE
  o þ




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##### 



MOUNTAIN NATIONAL BANCSHARES, INC.
Annual Report on Form 10-KSB
For the Fiscal Year Ended December 31, 2005
 Table of Contents
 Item
    
    
    
    PageNumber
    
    
    
    NumberPart I1.
    
    Description of Business
    
    
    12.
    
    Description of Property
    
    
    193.
    
    Legal Proceedings
    
    
    204.
    
    Submission of Matters to a Vote of
Security Holders
    
    
    20Part II5.
    
    Market for Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities
    
    
    206.
    
    Managements Discussion and Analysis
or Plan of Operation
    
    
    227.
    
    Financial Statements
    
    
    458.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    468A.
    
    Controls and Procedures
    
    
    478B.
    
    Other Information
    
    
    47Part III9.
    
    Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
    
    
    4710.
    
    Executive Compensation
    
    
    47EX-10.4  SUMMARY DESCRIPTIONEX-21  SUBSIDIARIES OF THE REGISTRANTEX-23.1  CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-23.2  CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1  SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32.1  SECTION 906 CERTIFICATION OF THE CEOEX-32.2  SECTION 906 CERTIFICATION OF THE CFO




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11.
    
    Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    4812.
    
    Certain Relationships and Related Transactions
    
    
    4813.
    
    Exhibits
    
    
    4814.
    
    Principal Accountant Fees and Services
    
    
    49Signatures
    
    
    50




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PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS
 Forward-Looking Statements
    
    
    the effects of future economic or business conditions;
    
    governmental monetary and fiscal policies, as well as legislative and regulatory
changes, including changes in banking, securities and tax laws and regulations;
    
    the risks of changes in interest rates on the levels, composition and costs of
deposits, loan demand, and the values of loan collateral, securities and interest
sensitive assets and liabilities;
    
    credit risks of borrowers;
    
    the effects of competition from a wide variety of local, regional, national and
other providers of financial, investment and insurance services;
    
    the failure of assumptions underlying the establishment of reserves for possible
loan losses and other estimates;
    
    the risks of mergers, acquisitions and divestitures, including, without
limitation, the related time and costs of implementing such transactions,
integrating operations as part of these transactions and the possible failure to
achieve expected gains, revenue growth and/or expense savings from such
transactions;
    
    changes in accounting policies, rules and practices;
 1




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




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Our Banking Business
 General .
   Market Areas .
 3




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Lending Activities
 General
 Real Estate Lending
     4




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Consumer Lending
 
    
    loans secured by junior liens on real estate, including home
improvement and home equity loans, which have an average maturity of about ten
years and generally are limited to 85% of appraised value;
    
    loans secured by personal property, such as automobiles, recreational
vehicles or boats, which typically have 36 to 60 month maturities;
    
    loans to our depositors secured by their time deposit accounts or
certificates of deposit;
    
    unsecured personal loans and personal lines of credit; and
    
    credit card loans.
  Construction Lending
   5




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Commercial Lending
  Creditworthiness and Collateral
 6




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Loan Originations
 Secondary Market Activities
 Income from Lending Activities
 Loan Delinquencies and Defaults
 Investment Activities
  Sources of Funds
 General
 7




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Deposits
 Borrowings
 Financing
  8




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Competition
     Employees
  9




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Seasonality
  Supervision and Regulation
 Supervision and Regulation
  Bank Holding Company Regulation
   10




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11




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De novo
  Bank Regulation
     12




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Community Reinvestment Act
   13




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Sarbanes-Oxley Act
  Payments of Dividends
   14




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Capital
     15




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RegulatoryMinimum
    
    Company
    
    BankTier 1 capital ratio
    
    
    4.0
    %
    
    
    13.15
    %
    
    
    12.06
    %Total capital ratio
    
    
    8.0
    %
    
    
    14.11
    %
    
    
    13.02
    %Leverage ratio
    
    
    3.0-5.0
    %
    
    
    10.44
    %
    
    
    9.57
    %
 FDICIA
    16




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




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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;
 18




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
    
    the designation of a compliance officer;
    
    an ongoing employee training program; and
    
    an independent audit function to test the programs.
  Legislative and Regulatory Changes
 de novo .
 Statistical Information
  
 ITEM 2. DESCRIPTION OF PROPERTY
      19




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




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Estimated Price RangePer ShareHigh
    
    Low2005:First Quarter
    
    $
    24.00
    
    
    $
    21.00Second Quarter
    
    
    24.00
    
    
    
    23.00Third Quarter
    
    
    29.75
    
    
    
    22.50Fourth Quarter
    
    
    29.25
    
    
    
    26.302004:First Quarter
    
    $
    15.40
    
    
    $
    15.00Second Quarter
    
    
    20.82
    
    
    
    20.82Third Quarter
    
    
    21.00
    
    
    
    21.00Fourth Quarter
    
    
    21.00
    
    
    
    21.00
     Issuer Purchases of Equity Securities
  21




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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  Overview
     22




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Critical Accounting Policies
   Impairment of Investment Securities
  Allowance and Provision for Loan Losses
  23




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Results of Operations for the Years Ended December 31, 2005 and 2004
 General Discussion of Our Results
  
    
    income received on interest-earning assets, such as loans and investment
securities; and
 
    
    payments we make on our interest-bearing sources of funds, such as deposits
and borrowings.
  
    
    increases or decreases in the volumes of interest-earning assets and
interest-bearing liabilities;
    
    increases or decreases in the average rates earned and paid on those assets
and liabilities;
    
    our ability to manage our interest-earning asset portfolio, which includes
loans;
    
    the availability and costs of particular sources of funds, such as
non-interest bearing deposits; and
    
    our ability to match liabilities to fund assets of similar maturities at a
profitable spread of rates earned on assets over rates paid on liabilities.
  Net Income
  24




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2005
    
    
    2004First Quarter
    
    $
    640,171
    
    
    $
    437,551Second Quarter
    
    
    720,863
    
    
    
    501,333Third Quarter
    
    
    862,185
    
    
    
    601,096Fourth Quarter
    
    
    900,283
    
    
    
    593,492Annual Total
    
    $
    3,123,502
    
    
    $
    2,133,472
  25




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%2005
    
    
    2004
    
    
    CHANGE(in thousands)Net Interest Income*
    
    $
    12,474
    
    
    $
    9,684
    
    
    
    28.8
    %Provision for Loan Losses
    
    
    446
    
    
    
    468
    
    
    
    (4.7
    %)Non-Interest Income
    
    
    2,682
    
    
    
    2,372
    
    
    
    13.1
    %Operating Expenses
    
    
    10,133
    
    
    
    8,221
    
    
    
    23.3
    %Net income before Income tax
provision
    
    $
    4,577
    
    
    $
    3,367
    
    
    
    35.9
    %
 
 *
    
    Net interest income is the difference between the interest income received on the Banks
earning assets and the interest expense paid on its deposits and borrowings.  Net Interest Income
 Average Balances, Interest Income, and Interest Expense
  26




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Average Balance Sheet and Analysis of Net Interest Income
for the Years Ended December 31,
(Dollars in thousands)
 2005
    
    2004
    
    2003Average
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate(Dollars in thousands)Assets:Investment securities (1):Available for sale
    
    $
    57,103
    
    
    
    2,450
    
    
    
    4.29
    %
    
    $
    37,431
    
    
    
    1,652
    
    
    
    4.41
    %
    
    $
    24,241
    
    
    
    853
    
    
    
    3.52
    %Held to maturity
    
    
    1,093
    
    
    
    54
    
    
    
    4.94
    %
    
    
    375
    
    
    
    21
    
    
    
    5.60
    %
    
    
    
    
    
    
    
    
    
    
    Unrealized gains on available for
sale securities
    
    
    (765
    )
    
    
    
    
    
    
    
    
    
    
    (299
    )
    
    
    
    
    
    
    
    
    
    
    145
    
    
    
    
    
    
    
    Federal funds sold
    
    
    4,789
    
    
    
    175
    
    
    
    3.65
    %
    
    
    1,634
    
    
    
    27
    
    
    
    1.65
    %
    
    
    882
    
    
    
    10
    
    
    
    1.13
    %Loans (2)(3)
    
    
    227,874
    
    
    
    16,545
    
    
    
    7.26
    %
    
    
    188,481
    
    
    
    11,618
    
    
    
    6.16
    %
    
    
    162,133
    
    
    
    10,836
    
    
    
    6.68
    %Allowance for loan losses
    
    
    (2,459
    )
    
    
    
    
    
    
    
    
    
    
    (2,137
    )
    
    
    
    
    
    
    
    
    
    
    (1,954
    )
    
    
    
    
    
    
    Cash and due from banks
    
    
    10,072
    
    
    
    
    
    
    
    
    
    
    
    6,972
    
    
    
    
    
    
    
    
    
    
    
    5,010
    
    
    
    
    
    
    
    Other assets
    
    
    22,168
    
    
    
    
    
    
    
    
    
    
    
    19,759
    
    
    
    
    
    
    
    
    
    
    
    16,526
    
    
    
    
    
    
    
    Total
    
    
    319,875
    
    
    
    
    
    
    
    
    
    
    
    252,216
    
    
    
    
    
    
    
    
    
    
    
    206,983
    
    
    
    
    
    
    
    Total interest-earning assets
    
    
    290,859
    
    
    
    19,224
    
    
    
    6.61
    %
    
    
    227,921
    
    
    
    13,318
    
    
    
    5.84
    %
    
    
    187,256
    
    
    
    11,699
    
    
    
    6.25
    %Liabilities:Noninterest-bearing demand
deposits
    
    
    46,187
    
    
    
    
    
    
    
    
    
    
    
    35,816
    
    
    
    
    
    
    
    
    
    
    
    27,946
    
    
    
    
    
    
    
    Interest bearing demand deposits
    
    
    98,356
    
    
    
    2,141
    
    
    
    2.18
    %
    
    
    79,254
    
    
    
    1,056
    
    
    
    1.33
    %
    
    
    62,964
    
    
    
    715
    
    
    
    1.14
    %Savings deposits
    
    
    6,764
    
    
    
    40
    
    
    
    0.59
    %
    
    
    6,112
    
    
    
    36
    
    
    
    0.59
    %
    
    
    4,414
    
    
    
    38
    
    
    
    0.86
    %Time deposits
    
    
    117,416
    
    
    
    3,504
    
    
    
    2.98
    %
    
    
    99,664
    
    
    
    2,109
    
    
    
    2.12
    %
    
    
    87,602
    
    
    
    2,290
    
    
    
    2.61
    %Total deposits
    
    
    268,723
    
    
    
    
    
    
    
    
    
    
    
    220,846
    
    
    
    
    
    
    
    
    
    
    
    182,926
    
    
    
    
    
    
    
    Subordinated debentures & other
borrowings
    
    
    28,186
    
    
    
    1,064
    
    
    
    3.77
    %
    
    
    15,671
    
    
    
    433
    
    
    
    2.76
    %
    
    
    10,321
    
    
    
    280
    
    
    
    2.71
    %Other liabilities
    
    
    1,739
    
    
    
    
    
    
    
    
    
    
    
    901
    
    
    
    
    
    
    
    
    
    
    
    899
    
    
    
    
    
    
    
    Shareholders equity
    
    
    21,227
    
    
    
    
    
    
    
    
    
    
    
    14,798
    
    
    
    
    
    
    
    
    
    
    
    12,837
    
    
    
    
    
    
    
    Total
    
    
    319,875
    
    
    
    
    
    
    
    
    
    
    
    252,216
    
    
    
    
    
    
    
    
    
    
    
    206,983
    
    
    
    
    
    
    
    Total interest-bearing liabilities
    
    
    250,722
    
    
    
    6,749
    
    
    
    2.69
    %
    
    
    200,701
    
    
    
    3,634
    
    
    
    1.81
    %
    
    
    165,301
    
    
    
    3,323
    
    
    
    2.01
    %Net interest income
    
    
    
    
    
    
    12,475
    
    
    
    
    
    
    
    
    
    
    
    9,684
    
    
    
    
    
    
    
    
    
    
    
    8,376
    
    
    
    Net interest spread (4)
    
    
    
    
    
    
    
    
    
    
    3.92
    %
    
    
    
    
    
    
    
    
    
    
    4.03
    %
    
    
    
    
    
    
    
    
    
    
    4.24
    %Net interest margin (5)
    
    
    
    
    
    
    
    
    
    
    4.29
    %
    
    
    
    
    
    
    
    
    
    
    4.25
    %
    
    
    
    
    
    
    
    
    
    
    4.47
    %
 
 (1)
    
    Tax-exempt income from investment securities is not presented on a tax-equivalent basis.(2)
    
    Interest income from loans includes total fee income of approximately $1,673,000, $1,169,000
and $1,373,000 for the years ended December 31, 2005, 2004, and 2003, respectively.(3)
    
    For the purpose of these computations, non-accrual loans are included in average loans.(4)
    
    Interest rate spread is the weighted average yield on interest-earning assets minus the
average rate on interest-bearing liabilities.(5)
    
    Net interest margin is net interest income divided by average interest-earning assets.    27




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Rate and Volume Analysis
  ANALYSIS OF CHANGES IN NET INTEREST INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
 2005 Compared to 2004Increase (decrease)due to change inRate
    
    
    Volume
    
    
    TotalIncome from interest-earning assets:Interest and fees on loans
    
    $
    2,507
    
    
    $
    2,420
    
    
    $
    4,927Interest on securities
    
    
    (70
    )
    
    
    901
    
    
    
    831Interest on Federal funds sold
    
    
    92
    
    
    
    55
    
    
    
    147Total interest income
    
    $
    2,529
    
    
    $
    3,376
    
    
    $
    5,905Expense from interest-bearing liabilities:Interest on interest-bearing deposits
    
    $
    830
    
    
    $
    259
    
    
    $
    1,089Interest on time deposits
    
    
    1,010
    
    
    
    385
    
    
    
    1,395Interest on other borrowings
    
    
    285
    
    
    
    346
    
    
    
    631Total interest expense
    
    $
    2,125
    
    
    $
    990
    
    
    $
    3,115Net interest income
    
    $
    404
    
    
    $
    2,386
    
    
    $
    2,790
 2004 Compared to 2003Increase (decrease)due to change inRate
    
    
    Volume
    
    
    TotalIncome from interest-earning assets:Interest and fees on loans
    
    $
    (979
    )
    
    $
    1,761
    
    
    $
    782Interest on securities
    
    
    343
    
    
    
    477
    
    
    
    820Interest on Federal funds sold
    
    
    9
    
    
    
    8
    
    
    
    17Total interest income
    
    $
    (627
    )
    
    $
    2,246
    
    
    $
    1,619Expense from interest-bearing liabilities:Interest on interest-bearing deposits
    
    $
    137
    
    
    $
    202
    
    
    $
    339Interest on time deposits
    
    
    (496
    )
    
    
    315
    
    
    
    (181
    )Interest on other borrowings
    
    
    8
    
    
    
    145
    
    
    
    153Total interest expense
    
    $
    (351
    )
    
    $
    662
    
    
    $
    311Net interest income
    
    $
    (276
    )
    
    $
    1,584
    
    
    $
    1,308
 28




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Provision for Loan Losses
    Other Income
  Interest Expense and Net Interest Margin
   29




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Other Expenses
  30




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Income Taxes
  Discussion of Financial Condition
 General Discussion of Our Financial Condition
    Loans
  31




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Loan Portfolio
 At December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(In Thousands)Commercial, financial, agricultural
    
    $
    15,375
    
    
    $
    9,870
    
    
    $
    10,489
    
    
    $
    7,542
    
    
    $
    8,403Real estate  construction, development, vacation
    
    
    80,719
    
    
    
    55,618
    
    
    
    44,086
    
    
    
    39,183
    
    
    
    24,060Real estate  mortgage
    
    
    144,898
    
    
    
    134,272
    
    
    
    119,821
    
    
    
    93,654
    
    
    
    64,987Consumer and other
    
    
    7,872
    
    
    
    9,418
    
    
    
    5,449
    
    
    
    5,989
    
    
    
    4,980Less allowance for loan losses
    
    
    2,634
    
    
    
    2,281
    
    
    
    2,142
    
    
    
    1,595
    
    
    
    847Loans, net
    
    $
    246,230
    
    
    $
    206,897
    
    
    $
    177,703
    
    
    $
    144,773
    
    
    $
    101,583
  Maturities and Sensitivities of Loan Portfolio to Changes in Interest Rates
 Maturity/RepricingOne year
    
    Over one year
    
    Over three years
    
    Over fiveor less
    
    through three years
    
    through five years
    
    years(Dollars in Thousands)Commercial, financial, agricultural
    
    $
    11,258
    
    
    $
    2,378
    
    
    $
    1,739
    
    
    $
    Real estate  construction, development, vacation
    
    
    62,124
    
    
    
    12,687
    
    
    
    5,524
    
    
    
    384Real estate  mortgage; Consumer and other
    
    
    97,016
    
    
    
    40,399
    
    
    
    7,438
    
    
    
    7,917Total
    
    $
    170,398
    
    
    $
    55,464
    
    
    $
    14,701
    
    
    $
    8,301
  32




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Allowance for Loan Losses
      33




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At December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(Dollars in Thousands)Loans accounted for on a nonaccrual basis
    
    $
    92
    
    
    $
    161
    
    
    $
    289
    
    
    $
    159
    
    
    $
    Loans contractually past due ninety days or more as
to interest or principal payments and still accruing
    
    
    342
    
    
    
    21
    
    
    
    1,460
    
    
    
    46
    
    
    
    35Loans, the terms of which have been renegotiated to
provide a reduction or deferral of interest or
principal because of deterioration in the financial
position of the borrower
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loans now current about which there are serious
doubts as to the ability of the borrower to comply
with present loan repayment terms
    
    
    95
    
    
    
    15
    
    
    
    182
    
    
    
    2,424
    
    
    
    968
  Interest income that would have been recorded on
nonaccrual loans under original terms
    
    $
    3,269Interest income that was recorded
on nonaccrual loans
    
    $
    1,015
   34




---



##### Table of Contents



December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(Dollars in Thousands)Average balance of loans outstanding
    
    $
    227,874
    
    
    $
    188,481
    
    
    $
    162,133
    
    
    $
    122,177
    
    
    $
    88,638Balnce of allowance for loan losses at beginning of year
    
    
    2,281
    
    
    
    2,142
    
    
    
    1,595
    
    
    
    847
    
    
    
    571Charge-offs:Real estate  mortgage
    
    
    64
    
    
    
    322
    
    
    
    10
    
    
    
    26
    
    
    
    35Consumer
    
    
    45
    
    
    
    46
    
    
    
    188
    
    
    
    19
    
    
    
    10Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146Recoveries:Real estate  mortgage
    
    
    10
    
    
    
    38
    
    
    
    4
    
    
    
    
    
    
    
    Consumer
    
    
    6
    
    
    
    1
    
    
    
    6
    
    
    
    13
    
    
    
    1Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net charge-offs
    
    
    93
    
    
    
    329
    
    
    
    188
    
    
    
    32
    
    
    
    190Additions to allowance charged to operations
    
    
    446
    
    
    
    468
    
    
    
    735
    
    
    
    780
    
    
    
    466Balance of allowance for loan losses at end of year
    
    
    2,634
    
    
    
    2,281
    
    
    
    2,142
    
    
    
    1,595
    
    
    
    847Ratio of net loan charge-offs during the year to
average loans outstanding during the year
    
    
    0.04
    %
    
    
    0.17
    %
    
    
    0.12
    %
    
    
    0.03
    %
    
    
    0.96
    %
  December 31,2005
    
    2004
    
    2003
    
    2002
    

    2001Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in each
    
    
    
    
    
    
    Loans in each
    
    
    
    
    
    
    Loans in each
    
    
    
    
    
    
    Loans in each
    
    
    
    
    
    
    Loans in eachCategory To
    
    
    
    
    
    
    Category To
    
    
    
    
    
    
    Category To
    
    
    
    
    
    
    Category To
    
    
    
    
    
    
    Category ToAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans(Dollars in Thousands)Commercial
    
    $
    77
    
    
    
    6.18
    %
    
    $
    49
    
    
    
    4.72
    %
    
    $
    52
    
    
    
    5.83
    %
    
    $
    38
    
    
    
    5.15
    %
    
    $
    42
    
    
    
    8.20
    %Real Estate
    
    
    2,400
    
    
    
    90.66
    %
    
    
    2,043
    
    
    
    90.78
    %
    
    
    1,981
    
    
    
    91.14
    %
    
    
    1,438
    
    
    
    90.76
    %
    
    
    705
    
    
    
    86.94
    %Consumer
    
    
    157
    
    
    
    3.16
    %
    
    
    188
    
    
    
    4.50
    %
    
    
    109
    
    
    
    3.03
    %
    
    
    120
    
    
    
    4.09
    %
    
    
    100
    
    
    
    4.86
    %Total
    
    $
    2,634
    
    
    
    100.00
    %
    
    $
    2,281
    
    
    
    100.00
    %
    
    $
    2,142
    
    
    
    100.00
    %
    
    $
    1,595
    
    
    
    100.00
    %
    
    $
    847
    
    
    
    100.00
    %
 35




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##### Table of Contents



Securities
    December 31,2005
    
    
    2004
    
    
    2003(Dollars in Thousands)Securities available for sale:U.S. Treasury and government
agencies and corporations
    
    $
    6,502
    
    
    $
    9,091
    
    
    $
    6,546Mortgage-backed securities
    
    
    40,851
    
    
    
    38,308
    
    
    
    15,710Obligations of states and political subdivisions
    
    
    9,663
    
    
    
    2,307
    
    
    
    Total
    
    
    57,016
    
    
    
    49,706
    
    
    
    22,256Securities held to maturity:Obligations of states and political subdivisions
    
    
    1,411
    
    
    
    999
    
    
    
    
 36




---



##### Table of Contents



MaturityOne year or
    
    
    
    
    
    
    After one year
    
    
    
    
    
    
    After five years
    
    
    
    
    
    
    After tenless
    
    
    Yield
    
    
    through five years
    
    
    Yield
    
    

through
ten years
    
    
    Yield
    
    
    years
    
    
    Yield(Dollars
in Thousands)U.S.
Treasury and government agencies and corporations
    
    $
    0
    
    
    
    0.00%
    
    
    $
    740
    
    
    
    4.82%
    
    
    $
    2,359
    
    
    
    4.12%
    
    
    $
    3,403
    
    
    
    4.76%Mortgage-backed securities
    
    
    0
    
    
    
    0.00%
    
    
    
    0
    
    
    
    0.00%
    
    
    
    2,856
    
    
    
    4.82%
    
    
    
    37,995
    
    
    
    4.55%Obligations of state and political subdivisions
    
    
    0
    
    
    
    0.00%
    
    
    
    242
    
    
    
    3.14%
    
    
    
    1,022
    
    
    
    3.58%
    
    
    
    9,810
    
    
    
    4.10%Total
    
    $
    0
    
    
    
    
    
    
    $
    982
    
    
    
    
    
    
    $
    6,237
    
    
    
    
    
    
    $
    51,208
  Deposits
  37




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in Thousands)Non-interest-bearing demand deposits
    
    $
    46,187
    
    
    
    0
    %
    
    $
    35,816
    
    
    
    0
    %
    
    $
    27,946
    
    
    
    0
    %Interest-bearing demand deposits
    
    
    98,356
    
    
    
    2.18
    %
    
    
    79,254
    
    
    
    1.33
    %
    
    
    62,964
    
    
    
    1.14
    %Savings deposits
    
    
    6,764
    
    
    
    0.59
    %
    
    
    6,112
    
    
    
    0.59
    %
    
    
    4,414
    
    
    
    0.86
    %Time deposits
    
    
    117,416
    
    
    
    2.98
    %
    
    
    99,664
    
    
    
    2.12
    %
    
    
    87,602
    
    
    
    2.61
    %Total
    
    $
    268,723
    
    
    
    
    
    
    $
    220,846
    
    
    
    
    
    
    $
    182,926
  (Dollars inThousands)Three months or less
    
    $
    16,647Over three months through six months
    
    
    12,597Over six months through 12 months
    
    
    23,662Over 12 months
    
    
    23,512Total
    
    $
    76,418
   38




---



##### Table of Contents



December 31,
    
    
    %2005
    
    
    2004
    
    
    CHANGE(in thousands)Non-Interest bearing accounts
    
    $
    53,545
    
    
    $
    41,342
    
    
    
    29.5
    %NOW Accounts
    
    
    56,758
    
    
    
    40,492
    
    
    
    40.2
    %Money Market Accounts
    
    
    43,356
    
    
    
    58,140
    
    
    
    (17.8
    %)Savings Accounts
    
    
    7,616
    
    
    
    6,464
    
    
    
    17.8
    %Certificates of Deposits
    
    
    115,190
    
    
    
    91,944
    
    
    
    25.3
    %Individual Retirement Accounts
    
    
    6,659
    
    
    
    6,690
    
    
    
    (0.5
    %)Total Deposits
    
    $
    283,124
    
    
    $
    245,072
    
    
    
    24.5
    %
 Interest Rate Sensitivity Management
     39




---



##### Table of Contents



40




---



##### Table of Contents



Analysis of Interest Sensitivity
As of December 31, 2005
(Dollars in Thousands)
 0  3
    
    
    3 - 12
    
    
    1 - 3
    
    
    Over 3Months
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalFederal funds sold
    
    $
    2,032
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    2,032Securities
    
    
    1,567
    
    
    
    4,669
    
    
    
    3,973
    
    
    
    49,847
    
    
    
    60,056Loans (1)
    
    
    154,952
    
    
    
    34,229
    
    
    
    48,578
    
    
    
    11,105
    
    
    
    248,864Total interest-earning assets
    
    $
    158,551
    
    
    $
    38,898
    
    
    $
    52,551
    
    
    $
    60,952
    
    
    $
    310,952Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    100,114
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    100,114Savings
    
    
    7,616
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    7,616Time deposits
    
    
    26,628
    
    
    
    60,534
    
    
    
    32,701
    
    
    
    1,986
    
    
    
    121,849Other borrowings
    
    
    14,404
    
    
    
    5,524
    
    
    
    12,561
    
    
    
    400
    
    
    
    32,889Total interest-bearing liabilities
    
    $
    148,762
    
    
    $
    66,058
    
    
    $
    45,262
    
    
    $
    2,386
    
    
    $
    262,468Interest rate sensitivity gap
    
    $
    9,789
    
    
    $
    (27,160
    )
    
    $
    7,289
    
    
    $
    58,566
    
    
    $
    48,484Cumulative interest rate sensitivity gap
    
    $
    9,789
    
    
    $
    (17,371
    )
    
    $
    (10,082
    )
    
    $
    48,484Interest rate sensitivity gap ratio
    
    
    6.17
    %
    
    
    (69.82
    %)
    
    
    13.87
    %
    
    
    96.09
    %Cumulative interest rate sensitivity gap ratio
    
    
    6.17
    %
    
    
    (8.80
    %)
    
    
    (4.03
    %)
    
    
    15.59
    %
 
 (1)
    
    Includes nonaccrual loans.   41




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##### Table of Contents



Return on Assets and Equity
  For the Years EndingDecember 31,2005
    
    2004
    
    2003Return on Average Assets
    
    
    0.98
    %
    
    
    0.85
    %
    
    
    0.80
    %Return on Average Equity
    
    
    16.87
    %
    
    
    14.53
    %
    
    
    12.56
    %Average Equity as a Percentage of Average Assets
    
    
    5.79
    %
    
    
    7.07
    %
    
    
    6.40
    %Dividend Payout Ratio
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
 Capital Adequacy and Liquidity
   Regulatory Capital Requirements
   42




---



##### Table of Contents



MinimumRegulatoryRequirement
    
    ActualTier 1 capital to risk adjusted assets
    
    
    4.00
    %
    
    
    13.15
    %Total capital to risk adjusted assets
    
    
    8.00
    %
    
    
    14.11
    %Tier 1 leverage ratio (to average quarterly assets)
    
    
    4.00
    %
    
    
    10.44
    %
   December 31, 2005
    
    December 31, 2004Tier 1 Risk-Based Capital
    
    
    13.15
    %
    
    
    9.94
    %Regulatory Minimum
    
    
    4.00
    
    
    
    4.00Well-capitalized
    
    
    N/A
    
    
    
    N/ATotal Risk-Based Capital
    
    
    14.11
    %
    
    
    10.96
    %Regulatory Minimum
    
    
    8.00
    
    
    
    8.00Well-capitalized
    
    
    N/A
    
    
    
    N/ATier 1 Leverage
    
    
    10.44
    %
    
    
    8.08
    %Regulatory Minimum
    
    
    4.00
    
    
    
    4.00Well-capitalized
    
    
    N/A
    
    
    
    N/A
  December 31, 2005
    
    December 31, 2004Tier 1 Risk-Based Capital
    
    
    12.06
    %
    
    
    9.65
    %Regulatory Minimum
    
    
    4.00
    
    
    
    4.00Well-capitalized
    
    
    6.00
    
    
    
    6.00Total Risk-Based Capital
    
    
    13.02
    %
    
    
    10.67
    %Regulatory Minimum
    
    
    8.00
    
    
    
    8.00Well-capitalized
    
    
    10.00
    
    
    
    10.00Tier 1 Leverage
    
    
    9.57
    %
    
    
    7.85
    %Regulatory Minimum
    
    
    4.00
    
    
    
    4.00Well-capitalized
    
    
    5.00
    
    
    
    5.00
  43




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Commitments and Lines of Credit
  44




---



##### Table of Contents



(Dollars in thousands)2005
    
    
    2004Commitments to extend credit
    
    $
    86,283
    
    
    $
    48,140Standby letters of credit
    
    
    4,084
    
    
    
    3,444Totals
    
    $
    90,367
    
    
    $
    51,584
  Effects of Inflation
   
 ITEM 7. FINANCIAL STATEMENTS
   45




---



##### Table of Contents



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
     46




---



##### Table of Contents



ITEM 8A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 ITEM 8B. OTHER INFORMATION
  
 PART
III
 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT
  
 ITEM 10. EXECUTIVE COMPENSATION
  47




---



##### Table of Contents



ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 13. EXHIBITS
  Exhibit No.
    
    Description of Exhibit2.1
    
    Plan of Reorganization dated March 28, 2003, by and between
the Registrant and Mountain National Bank (included as Exhibit
2.1 to the Report on Form 8-K12G3 of the Registrant, dated
July 12, 2003 (File No. 000-49912), previously filed with the
Commission and incorporated herein by reference).2.2
    
    Amendment to Plan of Reorganization dated July 1, 2003
(included as Exhibit 2.2 to the Report on Form 8-K12G3 of the
Registrant, dated July 12, 2003 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference).3.1
    
    Charter of Incorporation of the Registrant (included as
Exhibit 3.1 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).3.2
    
    Bylaws of the Registrant (included as Exhibit 3.2 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).10.1
    
    Stock Option Plan of the Registrant (included as Exhibit 10.1
to the Registrants Form 10-KSB for the year ended December
31, 2002 and incorporated herein by reference)*10.2
    
    Employment Agreement of Dwight B. Grizzell (included as
Exhibit 10.2 to the Registrants Form 10-KSB for the year
ended December 31, 2002 and incorporated herein by reference)*
 48




---



##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.3
    
    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)*10.4
    
    Summary Description of Director and Named Executive Officer
Compensation Arrangements*10.5
    
    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)21
    
    Subsidiaries of the Registrant23.1
    
    Consent of Independent Registered Public Accounting Firm23.2
    
    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.
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  49




---



##### Table of Contents



SIGNATURES
  MOUNTAIN NATIONAL BANCSHARES, INC.(Registrant)By:
    
    /s/ Dwight B. GrizzellDwight B. GrizzellPresident and Chief Executive OfficerDate: March 31, 2006
  /s/ Dwight B. Grizzell

Dwight B. Grizzell, President,
Chief Executive Officer and Director
    
    Date:  March 31, 2006/s/ Rick Hubbs

Rick Hubbs, Senior Vice President and
Chief Financial Officer
    
    Date:  March 31, 2006/s/ James F. Bookstaff

James E. Bookstaff, Director
    
    Date:  March 31, 2006/s/ Gary A. Helton

Gary A. Helton, Director
    
    Date:  March 31, 2006/s/ Charlie R. Johnson

Charlie R. Johnson, Director
    
    Date:  March 31, 2006/s/ Sam L. Large

Sam L. Large, Director
    
    Date:  March 31, 2006/s/ Jeffrey J. Monson

Jeffrey J. Monson, Director
    
    Date:  March 31, 2006
 50




---



##### Table of Contents



/s/ Linda N. Ogle

Linda N. Ogle, Director
    
    Date:  March 31, 2006/s/ Michael C. Ownby

Michael C. Ownby, Director
    
    Date:  March 31, 2006/s/ John R. Parker

John R. Parker, Director
    
    Date:  March 31, 2006/s/ Ruth Reams

Ruth Reams, Director
    
    Date:  March 31, 2006/s/ Barbara S. Stevens

Barbara S. Stevens, Director
    
    Date:  March 31, 2006
 51




---



##### Table of Contents



MOUNTAIN NATIONAL BANCSHARES, INC.
AND SUBSIDIARY
 CONSOLIDATED FINANCIAL REPORT
 DECEMBER 31, 2005




---



##### Table of Contents



PageREPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
    
    
    F-1  F-2CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheets
    
    
    F-3Consolidated statements of income
    
    
    F-4Consolidated statements of changes in shareholders equity
    
    
    F-5Consolidated statements of cash flows
    
    
    F-6Notes to consolidated financial statements
    
    
    F-7 - F-34




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    
 F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    
 F-2




---



##### Table of Contents



2005
    
    
    2004ASSETSCash and due from banks
    
    $
    17,866,025
    
    
    $
    8,770,202Federal funds sold
    
    
    2,032,000
    
    
    
    Cash and cash equivalents
    
    
    19,898,025
    
    
    
    8,770,202Securities available for sale
    
    
    57,016,193
    
    
    
    49,706,549Securities held to maturity, fair value $1,391,330 in 2005
and $991,980 in 2004
    
    
    1,411,390
    
    
    
    998,883Restricted investments, at cost
    
    
    1,628,868
    
    
    
    1,267,305Loans, net of allowance for loan losses of $2,634,175 in
2005 and $2,280,554 in 2004
    
    
    246,229,914
    
    
    
    206,896,783Premises and equipment
    
    
    15,650,863
    
    
    
    14,880,998Accrued interest receivable
    
    
    1,524,665
    
    
    
    1,041,319Cash surrender value of life insurance
    
    
    7,814,279
    
    
    
    3,930,613Other assets
    
    
    1,474,704
    
    
    
    1,737,851Total assets
    
    $
    352,648,901
    
    
    $
    289,230,503LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing demand deposits
    
    $
    53,544,988
    
    
    $
    41,341,894NOW accounts
    
    
    56,758,028
    
    
    
    40,492,048Money market accounts
    
    
    43,356,326
    
    
    
    58,140,593Savings accounts
    
    
    7,615,982
    
    
    
    6,463,756Time deposits
    
    
    121,848,466
    
    
    
    98,633,728Total deposits
    
    
    283,123,790
    
    
    
    245,072,019Federal funds purchased
    
    
    1,500,000
    
    
    
    8,625,000Securities sold under agreements to repurchase
    
    
    3,379,006
    
    
    
    2,849,567Accrued interest payable
    
    
    434,341
    
    
    
    225,595Subordinated debentures
    
    
    5,671,000
    
    
    
    5,671,000Federal Home Loan Bank advances
    
    
    22,509,744
    
    
    
    9,550,000Other liabilities
    
    
    6,398,012
    
    
    
    698,409Total liabilities
    
    
    323,015,893
    
    
    
    272,691,590Shareholders equity:Common stock, $1.00 par value; 2,400,000 shares authorized;
issued and outstanding 1,801,748 shares at December 31,
2005 and 1,268,614 shares at December 31, 2004
    
    
    1,801,748
    
    
    
    1,268,614Additional paid-in capital
    
    
    23,689,964
    
    
    
    12,059,704Retained earnings
    
    
    4,983,907
    
    
    
    3,400,852Accumulated other comprehensive income (loss)
    
    
    (842,611
    )
    
    
    (190,257
    )Total shareholders equity
    
    
    29,633,008
    
    
    
    16,538,913Total liabilities and shareholders equity
    
    $
    352,648,901
    
    
    $
    289,230,503
  F-3




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##### Table of Contents



2005
    
    
    2004INTEREST INCOMELoans
    
    $
    16,545,038
    
    
    $
    11,618,058Taxable securities
    
    
    2,108,720
    
    
    
    1,625,107Tax-exempt seceurities
    
    
    395,695
    
    
    
    47,885Federal funds sold and deposits in other banks
    
    
    174,636
    
    
    
    27,243Total Interest Income
    
    
    19,224,089
    
    
    
    13,318,293INTEREST EXPENSEDeposits
    
    
    5,685,712
    
    
    
    3,200,654Federal funds purchased
    
    
    38,563
    
    
    
    33,514Repurchase agreements
    
    
    64,165
    
    
    
    61,551Federal Home Loan Bank advances
    
    
    610,943
    
    
    
    81,638Subordinated debentures
    
    
    350,152
    
    
    
    256,498Total Interest Expense
    
    
    6,749,535
    
    
    
    3,633,855Net interest income
    
    
    12,474,554
    
    
    
    9,684,438Provision for loan losses
    
    
    446,000
    
    
    
    468,000Net interest income after provision for loan losses
    
    
    12,028,554
    
    
    
    9,216,438NONINTEREST INCOMEService charges on deposit accounts
    
    
    1,141,994
    
    
    
    1,041,235Other fees and commissions
    
    
    890,742
    
    
    
    571,844Gain on sale of mortgage loans
    
    
    400,657
    
    
    
    364,482Gain on sale of securities available for sale, net
    
    
    55,378
    
    
    
    204,177Other noninterest income
    
    
    187,313
    
    
    
    186,568Total noninterest income
    
    
    2,676,084
    
    
    
    2,368,306NONINTEREST EXPENSESalaries and employee benefits
    
    
    5,372,600
    
    
    
    4,457,428Occupancy expenses
    
    
    851,855
    
    
    
    672,928Other operating expenses
    
    
    3,903,100
    
    
    
    3,087,371Total noninterest expense
    
    
    10,127,555
    
    
    
    8,217,727Income before income taxes
    
    
    4,577,083
    
    
    
    3,367,017Income taxes
    
    
    1,453,581
    
    
    
    1,233,545Net income
    
    $
    3,123,502
    
    
    $
    2,133,472EARNINGS PER SHAREBasic
    
    $
    2.10
    
    
    $
    1.60Diluted
    
    
    1.90
    
    
    
    1.48
  F-4




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##### Table of Contents



AccumulatedTotal
    
    
    
    
    
    
    Additional
    
    
    
    
    
    OtherComprehensive
    
    
    Shareholders
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    ComprehensiveIncome
    
    
    Equity
    
    
    Stock
    
    
    Capital
    
    

Earnings
    
    
    Income/(Loss)BALANCE, January 1, 2004
    
    
    
    
    
    $
    14,498,690
    
    
    $
    1,260,702
    
    
    $
    11,992,294
    
    
    $
    1,267,380
    
    
    $
    (21,686
    )Exercise of stock options, 7,912 shares
    
    
    
    
    
    
    75,322
    
    
    
    7,912
    
    
    
    67,410Comprehensive income:Net income
    
    $
    2,133,472
    
    
    
    2,133,472
    
    
    
    
    
    
    
    
    
    
    
    2,133,472
    
    
    
    Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) on
securities available for
sale, net of
related tax effect
    
    
    (168,571
    )
    
    
    (168,571
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (168,571
    )Total comprehensive income
    
    $
    1,964,901BALANCE, December 31, 2004
    
    
    
    
    
    
    16,538,913
    
    
    
    1,268,614
    
    
    
    12,059,704
    
    
    
    3,400,852
    
    
    
    (190,257
    )BALANCE, January 1, 2005
    
    
    
    
    
    
    16,538,913
    
    
    
    1,268,614
    
    
    
    12,059,704
    
    
    
    3,400,852
    
    
    
    (190,257
    )Exercise of stock options, 53,152 shares
    
    
    
    
    
    
    727,829
    
    
    
    53,152
    
    
    
    674,677Declaration of 5% stock dividend
    
    
    
    
    
    
    (16,245
    )
    
    
    63,482
    
    
    
    1,460,720
    
    
    
    (1,540,447
    )
    
    
    Issuance of Common Stock
    
    
    
    
    
    
    9,911,363
    
    
    
    416,500
    
    
    
    9,494,863Comprehensive income:Net income
    
    $
    3,123,502
    
    
    
    3,123,502
    
    
    
    
    
    
    
    
    
    
    
    3,123,502
    
    
    
    Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) on
securities available for
sale, net of
reclassification adjustment
    
    
    (652,354
    )
    
    
    (652,354
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (652,354
    )Total comprehensive income
    
    $
    2,471,148BALANCE, December 31, 2005
    
    
    
    
    
    $
    29,633,008
    
    
    $
    1,801,748
    
    
    $
    23,689,964
    
    
    $
    4,983,907
    
    
    $
    (842,611
    )
  F-5




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##### Table of Contents



2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    3,123,502
    
    
    $
    2,133,472Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    913,490
    
    
    
    716,450Net realized gains on securities available for sale
    
    
    (55,378
    )
    
    
    (207,375
    )Net amortization on securities
    
    
    236,436
    
    
    
    167,911Provision for loan losses
    
    
    446,000
    
    
    
    468,000Gain on sale of other real estate
    
    
    (9,201
    )
    
    
    Deferred income taxes
    
    
    (98,247
    )
    
    
    41,245Gross mortgage loans originated for sale
    
    
    (40,599,140
    )
    
    
    (29,088,210
    )Gross proceeds from sale of mortgage loans
    
    
    40,882,267
    
    
    
    28,692,925Gain on sale of mortgage loans
    
    
    400,657
    
    
    
    364,482Increase in cash surrender value of life insurance
    
    
    (122,672
    )
    
    
    (136,680
    )Change in operating assets and liabilities:Accrued interest receivable
    
    
    (483,346
    )
    
    
    (119,036
    )Accrued interest payable
    
    
    208,746
    
    
    
    2,924Other assets and liabilities
    
    
    5,474,005
    
    
    
    (247,758
    )Net cash provided by operating activities
    
    
    10,317,119
    
    
    
    2,788,350CASH FLOWS FROM INVESTING ACTIVITIESActivity in available-for-sale securities:Proceeds from sales, maturities, and calls
    
    
    18,712,335
    
    
    
    39,298,215Purchases
    
    
    (26,908,968
    )
    
    
    (66,902,380
    )Activity in held-to-maturity securities:Purchases
    
    
    (358,930
    )
    
    
    (977,670
    )Purchases of other investments
    
    
    (361,563
    )
    
    
    (22,200
    )Loan originations and principal collections, net
    
    
    (40,462,915
    )
    
    
    (29,630,493
    )Purchase of premises and equipment
    
    
    (1,683,355
    )
    
    
    (3,576,499
    )Purchase of life insurance
    
    
    (3,760,994
    )
    
    
    (677,000
    )Proceeds from sale of other real estate
    
    
    596,194
    
    
    
    Net cash used in investing activities
    
    
    (54,228,196
    )
    
    
    (62,488,027
    )CASH FLOWS FROM FINANCING ACTIVITIESNet increase in deposits
    
    
    38,051,771
    
    
    
    48,141,961Net increase in Federal Home Loan Bank advances
    
    
    12,959,744
    
    
    
    9,550,000Net (decrease)/increase in federal funds purchased
    
    
    (7,125,000
    )
    
    
    4,225,000Net increase in securities sold under
agreements to repurchase
    
    
    529,439
    
    
    
    508,987Proceeds from sale of common stock
    
    
    10,639,191
    
    
    
    75,322Redemption of fractional shares
    
    
    (16,245
    )
    
    
    Net cash provided by financing activities
    
    
    (55,038,900
    )
    
    
    62,501,270NET INCREASE IN CASH AND CASH
EQUIVALENTS
    
    
    11,127,823
    
    
    
    2,801,593CASH AND CASH EQUIVALENTS, beginning of year
    
    
    8,770,202
    
    
    
    5,968,609CASH AND CASH EQUIVALENTS, end of year
    
    $
    19,898,025
    
    
    $
    8,770,202SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for interest
    
    $
    6,540,789
    
    
    $
    3,630,931Cash paid during the period for taxes
    
    $
    1,677,906
    
    
    $
    1,234,853
  F-6




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F-7




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F-8




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##### Table of Contents



F-9




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##### Table of Contents



F-10




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##### Table of Contents



F-11




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F-12




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##### Table of Contents



2005
    
    
    2004Net income, as reported
    
    $
    3,123,502
    
    
    $
    2,133,472Effect of stock-based employee compensation
expense determined under fair value method
for all awards, net of the related tax effects
    
    
    (53,484
    )
    
    
    (46,667
    )Pro forma net income
    
    $
    3,070,018
    
    
    $
    2,086,805
 2005
    
    
    2004Earnings per share:Basic-as reported
    
    $
    2.10
    
    
    $
    1.60Basic-pro forma
    
    $
    2.06
    
    
    $
    1.57Diluted-as reported
    
    $
    1.90
    
    
    $
    1.48Diluted-pro forma
    
    $
    1.87
    
    
    $
    1.44
   F-13




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##### Table of Contents



2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U.S. Government
securities
    
    $
    241,900
    
    
    $
    
    
    
    $
    (64
    )
    
    $
    241,836U.S. Government
agencies
    
    
    6,410,586
    
    
    
    
    
    
    
    (151,152
    )
    
    
    6,259,434Obligations of states and
political subdivisions
    
    
    9,640,394
    
    
    
    260,848
    
    
    
    (238,326
    )
    
    
    9,662,916Mortgage-backed
securities
    
    
    41,999,996
    
    
    
    692
    
    
    
    (1,148,681
    )
    
    
    40,852,007$
    58,292,876
    
    
    $
    261,540
    
    
    $
    (1,538,223
    )
    
    $
    57,016,193Securities held to maturity:Obligations of states and
political subdivisions
    
    $
    1,411,390
    
    
    $
    
    
    
    $
    (20,060
    )
    
    $
    1,391,330
 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U.S. Government
securities
    
    $
    256,718
    
    
    $
    196
    
    
    $
    
    
    
    $
    256,914U.S. Government
agencies
    
    
    8,894,883
    
    
    
    3,492
    
    
    
    (63,839
    )
    
    
    8,834,536Obligations of states and
political subdivisions
    
    
    2,320,623
    
    
    
    8,585
    
    
    
    (21,800
    )
    
    
    2,307,408Mortgage-backed
securities
    
    
    38,541,190
    
    
    
    18,012
    
    
    
    (251,511
    )
    
    
    38,307,691$
    50,013,414
    
    
    $
    30,285
    
    
    $
    (337,150
    )
    
    $
    49,706,549Securities held to maturity:Obligations of states and
political subdivisions
    
    $
    998,883
    
    
    $
    
    
    
    $
    (6,903
    )
    
    $
    991,980
 F-14




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##### Table of Contents



Less than 12 Months
    
    12 Months or More
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedDescription of Securties
    
    Value
    
    Loss
    
    Value
    
    Loss
    
    Value
    
    LossU. S. Government
securities
    
    $
    241,836
    
    
    $
    (64
    )
    
    $
    
    
    
    $
    
    
    
    $
    241,836
    
    
    $
    (64
    )U. S. Government
agencies
    
    
    1,960,313
    
    
    
    (36,348
    )
    
    
    4,299,122
    
    
    
    (114,804
    )
    
    $
    6,259,435
    
    
    $
    (151,152
    )Obligations of states and
political subdivisions
    
    
    8,371,914
    
    
    
    (229,733
    )
    
    
    486,325
    
    
    
    (21,393
    )
    
    $
    8,858,239
    
    
    $
    (251,126
    )Mortgage-backed
securities
    
    
    11,903,847
    
    
    
    (172,237
    )
    
    
    22,021,668
    
    
    
    (805,729
    )
    
    $
    33,925,515
    
    
    $
    (977,966
    )Total temporarily impaired
    
    $
    22,477,910
    
    
    $
    (438,382
    )
    
    $
    26,807,115
    
    
    $
    (941,926
    )
    
    $
    49,285,025
    
    
    $
    (1,380,308
    )
     F-15




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##### Table of Contents



Securities Available for Sale
    
    
    Securities Held to MaturityAmortized
    
    
    Market
    
    
    Amortized
    
    
    MarketCost
    
    
    Value
    
    
    Cost
    
    
    ValueDue in one year or less
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Due from one year to
five years
    
    
    983,671
    
    
    
    981,561
    
    
    
    
    
    
    
    Due from five years to
ten years
    
    
    3,460,160
    
    
    
    3,380,399
    
    
    
    
    
    
    
    Due after ten years
    
    
    11,849,049
    
    
    
    11,802,226
    
    
    
    1,411,390
    
    
    
    1,391,330Mortgage-backed
securities
    
    
    41,999,996
    
    
    
    40,852,007
    
    
    
    
    
    
    
    $
    58,292,876
    
    
    $
    57,016,193
    
    
    $
    1,411,390
    
    
    $
    1,391,330
  F-16




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##### Table of Contents



2005
    
    
    2004Mortgage loans on real estate:Residential 1-4 family
    
    $
    45,399,332
    
    
    $
    37,655,011Residential multifamily
    
    
    4,745,163
    
    
    
    5,911,651Commercial
    
    
    76,865,481
    
    
    
    76,386,545Construction
    
    
    80,718,991
    
    
    
    55,617,797Second mortgages
    
    
    2,630,052
    
    
    
    1,706,394Equity lines of credit
    
    
    15,258,439
    
    
    
    12,610,934225,617,458
    
    
    
    189,888,332Commercial loans
    
    
    15,375,236
    
    
    
    9,870,376Consumer installment loans:Personal
    
    
    6,402,307
    
    
    
    8,080,260Credit cards
    
    
    1,469,088
    
    
    
    1,338,3697,871,395
    
    
    
    9,418,629Total loans
    
    
    248,864,089
    
    
    
    209,177,337Less: Allowance for loan losses
    
    
    (2,634,175
    )
    
    
    (2,280,554
    )Loans, net
    
    $
    246,229,914
    
    
    $
    206,896,783
  2005
    
    
    2004Balance, beginning of year
    
    $
    2,280,554
    
    
    $
    2,141,783Provision for loan losses
    
    
    446,000
    
    
    
    468,000Loans charged-off
    
    
    (108,904
    )
    
    
    (367,019
    )Recoveries of loans previously charged-off
    
    
    16,525
    
    
    
    37,790Balance, end of year
    
    $
    2,634,175
    
    
    $
    2,280,554
 F-17




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##### Table of Contents



2005
    
    
    2004Year-end loans with allocated allowance
for loan losses
    
    $
    80,483
    
    
    $
    0Allowance for loan losses on impaired loans
    
    
    8,048
    
    
    
    Average of individually impaired loans
during the year
    
    
    6,233,859
    
    
    
    5,557,185
  2005
    
    
    2004Loans past due over 90 days still on accrual
    
    $
    342,400
    
    
    $
    21,424Nonaccrual loans
    
    
    92,031
    
    
    
    161,157
    F-18




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##### Table of Contents



2005
    
    
    2004Land
    
    $
    3,872,631
    
    
    $
    3,872,631Buildings and improvements
    
    
    10,423,195
    
    
    
    9,521,984Furniture, fixtures and equipment
    
    
    4,545,497
    
    
    
    3,965,83418,841,323
    
    
    
    17,360,449Accumulated depreciation
    
    
    (3,190,460
    )
    
    
    (2,479,451
    )$
    15,650,863
    
    
    $
    14,880,998
     2006
    
    $
    87,340,4372007
    
    
    22,856,9042008
    
    
    9,665,5312009
    
    
    1,194,0192010
    
    
    791,575Total
    
    $
    121,848,466
    2005
    
    
    2004Current tax expense
    
    $
    1,551,828
    
    
    $
    1,192,300Deferred tax expense (benefit)
    
    
    (98,247
    )
    
    
    41,245Income tax expense
    
    $
    1,453,581
    
    
    $
    1,233,545
 F-19




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##### Table of Contents



2005
    
    
    2004Expected tax at statutory rates
    
    $
    1,556,000
    
    
    $
    1,145,000Increase (decrease) resulting from tax effect of:State income taxes, net of federal tax benefit
    
    
    28,973
    
    
    
    139,100Increase in cash surrender value of life insurance
    
    
    (41,700
    )
    
    
    (52,400
    )Tax exempt interest
    
    
    (134,000
    )
    
    
    Other
    
    
    44,308
    
    
    
    845Income tax expense
    
    $
    1,453,581
    
    
    $
    1,233,545
  2005
    
    
    2004Deferred tax assets:Allowance for loan losses
    
    $
    733,367
    
    
    $
    562,600Deferred compensation
    
    
    60,401
    
    
    
    41,900Unrealized loss on securities available for sale
    
    
    434,072
    
    
    
    120,175Total deferred tax assets
    
    
    1,227,840
    
    
    
    724,675Deferred tax liabilities:Accelerated depreciation
    
    
    (485,863
    )
    
    
    (474,090
    )Other
    
    
    (212,648
    )
    
    
    (133,400
    )Total deferred tax liabilities
    
    
    (698,511
    )
    
    
    (607,490
    )Net deferred tax asset
    
    $
    529,329
    
    
    $
    117,185
 F-20




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##### Table of Contents



2005
    
    
    2004Long-term advance requiring monthly interest payments at
3.10% fixed, principal due in December 2005
    
    $
    
    
    
    $
    2,500,000Long-term advance requiring monthly interest payments at
2.52% fixed, principal due in August 2005
    
    
    
    
    
    
    1,600,000Long-term advance requiring monthly interest payments at
4.47% fixed, principal due in December 2012
    
    
    200,000
    
    
    
    Long-term advance requiring monthly interest payments at
4.32% fixed, principal due in June 2010
    
    
    200,000
    
    
    
    Long-term advance requiring monthly interest payments at
4.83% fixed, principal due in October 2008
    
    
    3,000,000
    
    
    
    Long-term advance requiring monthly principal and interest
payments at 4.20% fixed, remaining principal due in July
2008
    
    
    1,959,744
    
    
    
    Long-term advance requiring monthly interest payments at
4.15% fixed, principal due in June 2008
    
    
    2,500,000
    
    
    
    Long-term advance requiring monthly interest payments at
4.12% fixed, principal due in June 2008
    
    
    200,000
    
    
    
    Long-term advance requiring monthly interest payments at
4.84% fixed, principal due in December 2007
    
    
    2,500,000
    
    
    
    Long-term advance requiring monthly interest payments at
4.06% fixed, principal due in June 2007
    
    
    2,500,000
    
    
    
    Long-term advance requiring monthly interest payments at
4.80% variable, principal due in March 2007
    
    
    4,000,000
    
    
    
    Long-term advance requiring monthly interest payments at
3.44% fixed, principal due in December 2006
    
    
    2,500,000
    
    
    
    2,500,000Long-term advance requiring monthly interest payments at
3.12% fixed, principal due in August 2006
    
    
    2,950,000
    
    
    
    2,950,000$
    22,509,744
    
    
    $
    9,550,000




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##### Table of Contents



2005
    
    2004Weighted average borrowing rate at year-end
    
    

    1.04
    %
    
    

    1.43
    %Weighted average borrowing rate during the year
    
    

    1.50
    %
    
    

    2.94
    %Average daily balance during the year
    
    
    4,287,190
    
    
    
    4,068,087Maximum month-end balance during the year
    
    
    6,575,749
    
    
    
    5,123,465Balance at year-end
    
    $
    3,379,006
    
    
    $
    2,849,567
    F-22




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##### Table of Contents



2006
    
    $
    101,1782007
    
    
    101,3792008
    
    
    99,2222009
    
    
    100,7082010
    
    
    81,539Thereafter
    
    
    133,413Total
    
    $
    617,439
    F-23




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##### Table of Contents



F-24




---



##### Table of Contents



F-25




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##### Table of Contents



2005
    
    2004Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    19,898
    
    
    $
    19,898
    
    
    $
    8,770
    
    
    $
    8,770Securities
    
    
    58,428
    
    
    
    58,400
    
    
    
    50,705
    
    
    
    50,699Restricted investments
    
    
    1,629
    
    
    
    1,629
    
    
    
    1,267
    
    
    
    1,267Loans
    
    
    246,230
    
    
    
    245,281
    
    
    
    206,897
    
    
    
    206,443Cash surrender value of life insurance
    
    
    7,814
    
    
    
    7,814
    
    
    
    3,931
    
    
    
    3,931Accrued interest receivable
    
    
    1,525
    
    
    
    1,525
    
    
    
    1,041
    
    
    
    1,041Liabilities:Noninterest-bearing demand deposits
    
    $
    53,545
    
    
    $
    53,545
    
    
    $
    41,342
    
    
    $
    41,342NOW accounts
    
    
    56,758
    
    
    
    56,758
    
    
    
    40,492
    
    
    
    40,492Savings and money market accounts
    
    
    50,972
    
    
    
    50,972
    
    
    
    64,604
    
    
    
    64,604Time deposits
    
    
    121,848
    
    
    
    121,425
    
    
    
    98,634
    
    
    
    98,271Notes payable
    
    
    5,671
    
    
    
    5,671
    
    
    
    5,671
    
    
    
    5,671Federal funds purchased and securities
sold under agreements to repurchase
    
    
    4,879
    
    
    
    4,879
    
    
    
    11,475
    
    
    
    11,475Federal Home Loan Bank advances
    
    
    22,510
    
    
    
    22,510
    
    
    
    9,550
    
    
    
    9,550Accrued interest payable
    
    
    434
    
    
    
    434
    
    
    
    226
    
    
    
    226Unrecognized financial instruments
(net of contract amount):Commitments to extend credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lines of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    F-26




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##### Table of Contents



Unexercised Options
    
    
    Exercisable OptionsNumber
    
    
    Weighted Average
    
    
    Number
    
    
    Weighted Averageof Shares
    
    
    Exercise Price
    
    
    of Shares
    
    
    Exercise PriceOutstanding, December 31, 2003
    
    
    212,615
    
    
    $
    9.84
    
    
    
    134,527
    
    
    $
    9.79Options granted
    
    
    8,816
    
    
    
    19.83
    
    
    
    
    
    
    
    Options which became exercisable
    
    
    
    
    
    
    
    
    
    
    28,573
    
    
    
    11.23Options exercised
    
    
    (7,912
    )
    
    
    9.52
    
    
    
    (7,912
    )
    
    
    9.52Options rescinded
    
    
    (525
    )
    
    
    19.83
    
    
    
    (105
    )
    
    
    19.83Outstanding, December 31, 2004
    
    
    212,994
    
    
    
    10.24
    
    
    
    155,083
    
    
    
    9.77Options granted
    
    
    31,019
    
    
    
    24.01
    
    
    
    
    
    
    
    Options which became exercisable
    
    
    
    
    
    
    
    
    
    
    29,968
    
    
    
    11.39Options exercised
    
    
    (53,152
    )
    
    
    9.47
    
    
    
    (53,152
    )
    
    
    9.47Options rescinded
    
    
    (1,433
    )
    
    
    13.61
    
    
    
    (331
    )
    
    
    13.61Outstanding, December 31, 2005
    
    
    189,428
    
    
    
    12.66
    
    
    
    131,568
    
    
    
    10.08




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##### Table of Contents



Outstanding
    
    
    ExerciseableWeightedRange of
    
    
    
    
    
    Average
    
    
    Weighted
    
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    Remaining
    
    
    Average
    
    
    
    
    
    
    AveragePrices
    
    Number
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Number
    
    
    Exercise Price$9 - $10
    
    
    121,705
    
    
    
    2.94
    
    
    $
    9.09
    
    
    
    110,687
    
    
    $
    9.10$13 - $14
    
    
    28,414
    
    
    
    7.38
    
    
    $
    13.61
    
    
    
    16,231
    
    
    $
    13.61$19 - $20
    
    
    9,054
    
    
    
    8.46
    
    
    $
    19.85
    
    
    
    3,150
    
    
    $
    19.83$24 - $25
    
    
    30,255
    
    
    
    9.59
    
    
    $
    24.00
    
    
    
    1,500
    
    
    $
    24.01Outstanding at year end
    
    
    189,428
    
    
    
    
    
    
    
    
    
    
    
    131,568
  2005
    
    2004Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected life
    
    7.0 years
    
    6.5 yearsExpected volatility
    
    
    10
    %
    
    
    15
    %Risk-free interest rate
    
    
    4.28
    %
    
    
    4.70
    %




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##### Table of Contents



For CapitalActual
    
    Adequacy Purposes
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2005:Total capital to risk-weighted assets:Consolidated
    
    $
    38,610
    
    
    
    14.11
    %
    
    $
    21,893
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    35,620
    
    
    
    13.02
    %
    
    
    21,884
    
    
    
    8.00
    %
    
    
    27,355
    
    
    
    10.00
    %Tier I capital to risk-weighted assets:Consolidated
    
    
    35,976
    
    
    
    13.15
    %
    
    
    10,947
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    32,986
    
    
    
    12.06
    %
    
    
    10,942
    
    
    
    4.00
    %
    
    
    16,413
    
    
    
    6.00
    %Tier I capital to average assets:Consolidated
    
    
    35,976
    
    
    
    10.44
    %
    
    
    13,785
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    32,986
    
    
    
    9.57
    %
    
    
    13,785
    
    
    
    4.00
    %
    
    
    17,232
    
    
    
    5.00
    %
 For CapitalActual
    
    Adequacy Purposes
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2004:Total capital to risk-weighted assets:Consolidated
    
    $
    24,510
    
    
    
    10.96
    %
    
    $
    17,888
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    23,833
    
    
    
    10.67
    %
    
    
    17,865
    
    
    
    8.00
    %
    
    
    22,311
    
    
    
    10.00
    %Tier I capital to risk-weighted assets:Consolidated
    
    
    22,229
    
    
    
    9.94
    %
    
    
    8,944
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    21,552
    
    
    
    9.65
    %
    
    
    8,932
    
    
    
    4.00
    %
    
    
    13,399
    
    
    
    6.00
    %Tier I capital to average assets:Consolidated
    
    
    22,229
    
    
    
    8.08
    %
    
    
    10,998
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    21,552
    
    
    
    7.85
    %
    
    
    10,981
    
    
    
    4.00
    %
    
    
    13,726
    
    
    
    5.00
    %




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##### Table of Contents



TaxBefore-Tax
    
    
    (Expense)
    
    
    Net-of-TaxAmount
    
    
    Benefit
    
    
    AmountYear ended December 31, 2005:Unrealized holding gains and losses
arising during the period
    
    $
    (990,929
    )
    
    $
    376,553
    
    
    $
    (614,376
    )Less reclassification adjustment for
gains realized in net income
    
    
    61,255
    
    
    
    (23,277
    )
    
    
    37,978$
    (1,052,184
    )
    
    $
    399,830
    
    
    $
    (652,354
    )Year ended December 31, 2004:Unrealized holding gains and losses
arising during the period
    
    $
    (64,514
    )
    
    $
    24,515
    
    
    $
    (39,999
    )Less reclassification adjustment for
gains realized in net income
    
    
    207,375
    
    
    
    (78,803
    )
    
    
    128,572$
    (271,889
    )
    
    $
    103,318
    
    
    $
    (168,571
    )




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##### Table of Contents



2005
    
    
    2004Net income applicable to common stock
    
    $
    3,123,502
    
    
    $
    2,133,472Average number of common shares outstanding
    
    
    1,490,585
    
    
    
    1,332,045Dilutive effect of stock options
    
    
    96,018
    
    
    
    114,080Dilutive effect of warrants
    
    
    57,669
    
    
    
    Average number of common shares outstanding used
to calculate diluted earnings per common share
    
    
    1,644,272
    
    
    
    1,446,124




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##### Table of Contents








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##### Table of Contents



2005
    
    
    2004BALANCE
SHEETSASSETSCash
    
    $
    2,459,298
    
    
    $
    423,674Investment in subsidiary
    
    
    32,143,873
    
    
    
    21,362,123Other assets
    
    
    497,221
    
    
    
    451,873Total assets
    
    $
    35,100,392
    
    
    $
    22,237,670LIABILITIES AND SHAREHOLDERS EQUITYNotes payable
    
    $
    5,671,000
    
    
    $
    5,671,000Other liabilities
    
    
    (203,616
    )
    
    
    27,757Total liabilities
    
    
    5,467,384
    
    
    
    5,698,757Shareholders equity
    
    
    29,633,008
    
    
    
    16,538,913Total liabilities and stockholders equity
    
    $
    35,100,392
    
    
    $
    22,237,670STATEMENTS
OF INCOMEINCOME
    
    $
    
    
    
    $
    7,734EXPENSES
    
    
    514,948
    
    
    
    350,829Loss before equity in undistributed earnings of subsidiary
    
    
    (514,948
    )
    
    
    (343,095
    )Equity in undistributed earnings of subsidiary
    
    
    3,434,104
    
    
    
    2,344,892Income tax benefit
    
    
    204,346
    
    
    
    131,675Net income
    
    $
    3,123,502
    
    
    $
    2,133,472




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##### Table of Contents



2005
    
    
    2004STATEMENTS
OF CASH FLOWSCASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    3,123,502
    
    
    $
    2,133,472Adjustments to reconcile net income to net cash
provided by operating activities:Equity in undistributed income of subsidiary
    
    
    (3,434,104
    )
    
    
    (1,899,251
    )Other
    
    
    (276,720
    )
    
    
    (109,666
    )Net cash provided by (used in) operating activities
    
    
    (587,322
    )
    
    
    124,555CASH FLOWS FROM INVESTING ACTIVITIESPayments for investments in and advances to subsidiaries
    
    
    (8,000,000
    )
    
    
    Net cash used in investing activities
    
    
    (8,000,000
    )
    
    
    CASH FLOWS FROM FINANCING ACTIVITIESRedemption of fractional shares
    
    
    (16,245
    )
    
    
    Proceeds from issuance of common stock
    
    
    10,639,191
    
    
    
    75,322Net cash provided by financing activities
    
    
    10,622,946
    
    
    
    75,322NET INCREASE IN CASH AND CASH
EQUIVALENTS
    
    
    2,035,624
    
    
    
    199,877CASH AND CASH EQUIVALENTS, beginning of year
    
    
    423,674
    
    
    
    223,797CASH AND CASH EQUIVALENTS, end of year
    
    $
    2,459,298
    
    
    $
    423,674SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATIONCash paid (received) during the year for:Interest
    
    $
    350,152
    
    
    $
    256,498Income taxes
    
    
    (131,675
    )
    
    
    (27,757
    )