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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, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-49912
 MOUNTAIN NATIONAL BANCSHARES, INC.
  Tennessee
    
    75-3036312(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer Identification No.)300 East Main Street, Sevierville, Tennessee
(Address of principal executive offices)
    
    37862
(Zip code)
 (865) 428-7990
    YesoNoþ
 YesoNoþ
 Yes þ No o
 YesoNoo
 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, 2009
 Table of Contents
 Item
    
    PageNumber
    
    NumberPart I1. Business
    
    
    11A. Risk Factors
    
    
    212. Properties
    
    
    293. Legal Proceedings
    
    
    304. Removed and Reserved
    
    
    31Part II5. Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
    
    
    317. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    328. Financial Statements and Supplementary Data
    
    
    629. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    639A(T). Controls and Procedures
    
    
    639B. Other Information
    
    
    64Part III10. Directors, Executive Officers and Corporate Governance
    
    
    6411. Executive Compensation
    
    
    6412. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    6413. Certain Relationships and Related Transactions, and
Director Independence
    
    
    6414. Principal Accountant Fees and Services
    
    
    65Part IV15. Exhibits and Financial Statement Schedules
    
    
    65Signatures
    
    
    68Exhibit 3.1Exhibit 10.3Exhibit 21Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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




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
    
    the effects of failing to comply with our regulatory commitments;
 
    
    changes in accounting policies, rules and practices;
 
    
    changes in technology or products that may be more difficult, or costly, or less
effective, than anticipated;
 
    
    the effects of war or other conflicts, acts of terrorism or other catastrophic
events that may affect general economic conditions;
 
    
    results of regulatory examinations; and
 
    
    other factors and information described in this report and in any of our other
reports that we make with the Securities and Exchange Commission (the Commission)
under the Exchange Act.
  The Company
      2




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The Bank
  Our Banking Business
 General .
    3




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




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Commercial Lending
   5




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




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




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Borrowings
 Financing
    8




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Competition
    Employees
  Seasonality
   9




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Supervision and Regulation
 Supervision and Regulation
  Bank Holding Company Regulation
     10




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De novo
   11




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Bank Regulation
      12




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Community Reinvestment Act
    13




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Sarbanes-Oxley Act
  Emergency Economic Stabilization Act
   14




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Payments of Dividends
    Capital
   15




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16




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Regulatory Minimum to
    
    
    Regulatory Minimumbe Adequately Capitalized
    
    
    to be Well Capitalized
    
    
    Company
    
    
    BankTier 1 capital ratio
    
    
    4.0
    %
    
    
    6.0
    %
    
    
    12.89
    %
    
    
    12.75
    %Total capital ratio
    
    
    8.0
    %
    
    
    10.0
    %
    
    
    14.16
    %
    
    
    14.02
    %Leverage ratio
    
    
    3.0-5.0
    %
    
    
    5.0
    %
    
    
    9.23
    %
    
    
    9.14
    %
 FDICIA
    Enforcement Policies and Actions
   17




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Fiscal and Monetary Policy
  FDIC Insurance Assessments
     18




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Other Laws and Regulations
   19




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
    
    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.
  Statistical Information
   20




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ITEM 1A.
    
    RISK FACTORS
 Negative developments in the U.S. and local economy and in local real estate markets have adversely
impacted the Companys operations and results and may continue to adversely impact our results in
the future.
  We have a concentration of credit exposure to borrowers dependent on the tourism industry.
  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.
   21




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Our business is subject to local real estate market and other local economic conditions.
  We are geographically concentrated in Sevier County and Blount County, Tennessee, and changes in
local economic conditions impact our profitability.
   22




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We could sustain losses if our asset quality declines.
  If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will
decrease.
    23




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We have increased levels of other real estate owned, primarily as a result of foreclosures, and we
anticipate higher levels of foreclosed real estate expense.
  Competition with other banking institutions could adversely affect our profitability.
  Fluctuations in interest rates could reduce our profitability.
     24




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Liquidity needs could adversely affect our results of operations and financial condition.
  Our ability to maintain required capital levels and adequate sources of funding and liquidity could
be impacted by changes in the capital markets and deteriorating economic and market conditions.
  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.
    25




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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.
    26




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National or state legislation or regulation may increase our expenses and reduce earnings.
  Legislative and regulatory initiatives that were enacted in response to the financial crisis are
beginning to wind down.
  Although we have initiated efforts to reduce our reliance on noncore funding, this type of funding
still represents a significant component of our funding base.
   27




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If the federal funds rate remains at current extremely low levels, our net interest margin, and
consequently our net earnings, may be negatively impacted
  We have a significant deferred tax asset and cannot give any assurance that it will be fully
realized.
   28




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Holders of the Companys junior subordinated debentures have rights that are senior to those of the
Companys common shareholders.
  If a change in control or change in management is delayed or prevented, the market price of our
common stock could be negatively affected.
  An investment in the Companys common stock is not an insured deposit.
  
 ITEM 2.
    
    PROPERTIES
     29




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ITEM 3.
    
    LEGAL PROCEEDINGS
   30




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ITEM 4.
    
    REMOVED AND RESERVED
 
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  Market Price RangePer ShareYear/Period
    
    High
    
    
    Low2009:
    
    $
    16.75
    
    
    $
    8.00First Quarter
    
    
    16.75
    
    
    
    11.00Second Quarter
    
    
    16.50
    
    
    
    12.50Third Quarter
    
    
    15.00
    
    
    
    9.00Fourth Quarter
    
    
    10.50
    
    
    
    8.002008:
    
    $
    25.00
    
    
    $
    16.20First Quarter
    
    
    25.00
    
    
    
    20.00Second Quarter
    
    
    25.00
    
    
    
    19.90Third Quarter
    
    
    22.00
    
    
    
    18.00Fourth Quarter
    
    
    18.50
    
    
    
    16.20
     31




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Issuer Purchases of Equity Securities
  
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
  Overview
   32




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Critical Accounting Policies
   Valuation of Investment Securities
    Allowance and Provision for Loan Losses
   33




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Valuation of Other Real Estate Owned
  Results of Operations for the Years Ended December 31, 2009 and 2008
 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.
  34




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Net Income (Loss)
  Years Ended December 31,
    
    
    Dollar Change
    
    
    Percent Change2009
    
    
    2008
    
    
    2009 to 2008
    
    
    2009 to 2008Interest income
    
    $
    31,369
    
    
    $
    35,193
    
    
    $
    (3,824
    )
    
    
    -10.87
    %Interest expense
    
    
    13,358
    
    
    
    16,934
    
    
    
    (3,576
    )
    
    
    -21.12
    %Net interest income
    
    
    18,011
    
    
    
    18,259
    
    
    
    (248
    )
    
    
    -1.36
    %Provision for loan losses
    
    
    11,673
    
    
    
    2,275
    
    
    
    9,398
    
    
    
    413.10
    %Net interest income after
provision for loan losses
    
    
    6,338
    
    
    
    15,984
    
    
    
    (9,646
    )
    
    
    -60.35
    %Noninterest income
    
    
    4,863
    
    
    
    4,325
    
    
    
    538
    
    
    
    12.44
    %Noninterest expense
    
    
    19,217
    
    
    
    16,202
    
    
    
    3,015
    
    
    
    18.61
    %Net income (loss) before
income taxes
    
    
    (8,016
    )
    
    
    4,107
    
    
    
    (12,123
    )
    
    
    -295.18
    %Income tax expense (benefit)
    
    
    (3,788
    )
    
    
    827
    
    
    
    (4,615
    )
    
    
    -558.04
    %Net income (loss) before
    
    $
    (4,228
    )
    
    $
    3,280
    
    
    $
    (7,508
    )
    
    
    -228.90
    %Total revenues
    
    $
    36,232
    
    
    $
    39,518Total expenses
    
    
    40,460
    
    
    
    36,238Basic earnings (loss) per share
    
    
    (1.61
    )
    
    
    1.24Diluted earnings (loss) per
share
    
    
    (1.61
    )
    
    
    1.24
   35




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2009
    
    
    2008First Quarter
    
    $
    (673,634
    )
    
    $
    790,580Second Quarter
    
    
    (789,050
    )
    
    
    929,137Third Quarter
    
    
    1,028,162
    
    
    
    868,204Fourth Quarter
    
    
    (3,793,873
    )
    
    
    692,287Annual Total
    
    $
    (4,228,395
    )
    
    $
    3,280,208
  Net Interest Income
 Average Balances, Interest Income, and Interest Expense
   36




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Average Balance Sheet and Analysis of Net Interest Income
for the Years Ended December 31, 2009 and 2008  (in thousands, except rates)
 Average Balance
    
    
    Income/Expense
    
    
    Yield/Rate2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interest-earning assets:Loans (1)(2)
    
    $
    415,522
    
    
    $
    417,124
    
    
    $
    25,072
    
    
    $
    29,921
    
    
    
    6.03
    %
    
    
    7.17
    %Investment Securities: (3)Available for sale
    
    
    151,729
    
    
    
    101,210
    
    
    
    5,994
    
    
    
    4,926
    
    
    
    3.95
    %
    
    
    4.87
    %Held to maturity
    
    
    2,156
    
    
    
    2,073
    
    
    
    87
    
    
    
    96
    
    
    
    4.04
    %
    
    
    4.63
    %Equity securities
    
    
    3,895
    
    
    
    3,799
    
    
    
    191
    
    
    
    201
    
    
    
    4.90
    %
    
    
    5.29
    %Total securities
    
    
    157,780
    
    
    
    107,082
    
    
    
    6,272
    
    
    
    5,223
    
    
    
    3.98
    %
    
    
    4.88
    %Federal funds sold and other
    
    
    13,295
    
    
    
    2,147
    
    
    
    25
    
    
    
    49
    
    
    
    0.19
    %
    
    
    2.28
    %Total interest-earning
assets
    
    
    586,597
    
    
    
    526,353
    
    
    
    31,369
    
    
    
    35,193
    
    
    
    5.35
    %
    
    
    6.69
    %Nonearning assets
    
    
    72,816
    
    
    
    56,617Total Assets
    
    $
    659,413
    
    
    $
    582,970Interest-bearing liabilities:Interest bearing deposits:Interest bearing
demand deposits
    
    
    150,384
    
    
    
    142,020
    
    
    
    1,856
    
    
    
    3,067
    
    
    
    1.23
    %
    
    
    2.16
    %Savings deposits
    
    
    17,340
    
    
    
    13,815
    
    
    
    241
    
    
    
    269
    
    
    
    1.39
    %
    
    
    1.95
    %Time deposits
    
    
    304,715
    
    
    
    224,055
    
    
    
    8,151
    
    
    
    9,579
    
    
    
    2.67
    %
    
    
    4.28
    %Total interest bearing deposits
    
    
    472,439
    
    
    
    379,890
    
    
    
    10,248
    
    
    
    12,915
    
    
    
    2.17
    %
    
    
    3.40
    %Securities sold under agreements
to repurchase
    
    
    4,284
    
    
    
    5,093
    
    
    
    91
    
    
    
    129
    
    
    
    2.12
    %
    
    
    2.53
    %Federal Home Loan Bank advances
and other borrowings
    
    
    68,442
    
    
    
    83,024
    
    
    
    2,627
    
    
    
    3,127
    
    
    
    3.84
    %
    
    
    3.77
    %Subordinated debt
    
    
    13,403
    
    
    
    13,403
    
    
    
    392
    
    
    
    763
    
    
    
    2.92
    %
    
    
    5.69
    %Total interest-bearing liabilities
    
    
    558,568
    
    
    
    481,410
    
    
    
    13,358
    
    
    
    16,934
    
    
    
    2.39
    %
    
    
    3.52
    %Noninterest-bearing deposits
    
    
    45,761
    
    
    
    48,331
    
    
    
    
    
    
    
    Total deposits and interest-bearings liabilities
    
    
    604,329
    
    
    
    529,741
    
    
    
    13,358
    
    
    
    16,934
    
    
    
    2.21
    %
    
    
    3.20
    %Other liabilities
    
    
    3,143
    
    
    
    2,616Shareholders equity
    
    
    51,941
    
    
    
    50,613$
    659,413
    
    
    $
    582,970Net interest income
    
    
    
    
    
    
    
    
    
    $
    18,011
    
    
    $
    18,259Net interest spread (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.96
    %
    
    
    3.17
    %Net interest margin (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.07
    %
    
    
    3.47
    %
 
 (1)
    
    Interest income from loans includes total fee income of approximately $1,134,000 and
$1,786,000 for the years ended December 31, 2009 and 2008, 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.  37




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Rate and Volume Analysis
   39




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ANALYSIS OF CHANGES IN NET INTEREST INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008  (dollars in thousands)
 2009 Compared to 2008Increase (decrease)due to change inRate
    
    
    Volume
    
    
    TotalIncome from interest-earning assets:Interest and fees on loans
    
    $
    (4,734
    )
    
    $
    (115
    )
    
    $
    (4,849
    )Interest on securities
    
    
    (1,425
    )
    
    
    2,474
    
    
    
    1,049Interest on Federal funds sold and other
    
    
    (278
    )
    
    
    254
    
    
    
    (24
    )Total interest income
    
    
    (6,437
    )
    
    
    2,613
    
    
    
    (3,824
    )Expense from interest-bearing liabilities:Interest on interest-bearing deposits
    
    
    (1,493
    )
    
    
    254
    
    
    
    (1,239
    )Interest on time deposits
    
    
    (4,891
    )
    
    
    3,463
    
    
    
    (1,428
    )Interest on other borrowings
    
    
    (300
    )
    
    
    (609
    )
    
    
    (909
    )Total interest expense
    
    
    (6,684
    )
    
    
    3,108
    
    
    
    (3,576
    )Net interest income
    
    $
    247
    
    
    $
    (495
    )
    
    $
    (248
    )
 Provision for Loan Losses
    40




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Noninterest Income
  Years Ended December 31,
    
    
    Dollar Change
    
    
    Percent Change2009
    
    
    2008
    
    
    2009 to 2008
    
    
    2009 to 2008Service charges on deposit
accounts
    
    $
    2,327
    
    
    $
    1,424
    
    
    $
    903
    
    
    
    63.41
    %Other fees and commissions
    
    
    1,262
    
    
    
    1,222
    
    
    
    40
    
    
    
    3.27
    %Gain on sale of mortgage loans
    
    
    147
    
    
    
    163
    
    
    
    (16
    )
    
    
    -9.82
    %Gain on sale of securities, net
    
    
    2,558
    
    
    
    179
    
    
    
    2,379
    
    
    
    1,329.05
    %Loss on impairment of securities
    
    
    (347
    )
    
    
    
    
    
    
    (347
    )
    
    
    100.00
    %Gain (loss) on other real
estate, net
    
    
    (1,479
    )
    
    
    759
    
    
    
    (2,238
    )
    
    
    -294.86
    %Other noninterest income
    
    
    395
    
    
    
    578
    
    
    
    (183
    )
    
    
    -31.66
    %Total noninterest income
    
    $
    4,863
    
    
    $
    4,325
    
    
    $
    538
    
    
    
    12.44
    %
     41




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Noninterest Expenses
  Years Ended December 31,
    
    
    Dollar Change
    
    
    Percent Change2009
    
    
    2008
    
    
    2009 to 2008
    
    
    2009 to 2008Salaries and employee
benefits
    
    $
    9,670
    
    
    $
    9,232
    
    
    $
    438
    
    
    
    4.74
    %Occupancy expenses
    
    
    1,699
    
    
    
    1,324
    
    
    
    375
    
    
    
    28.32
    %FDIC assessment expense
    
    
    1,537
    
    
    
    354
    
    
    
    1,183
    
    
    
    334.18
    %Other operating expenses
    
    
    6,311
    
    
    
    5,293
    
    
    
    1,018
    
    
    
    19.23
    %Total noninterest expense
    
    $
    19,217
    
    
    $
    16,203
    
    
    $
    3,014
    
    
    
    18.60
    %
     42




---



##### Table of Contents



Income Taxes
  Provision for Income Taxes and Effective Tax Rates  (dollars in thousands)
 Provision
    
    
    Effective Tax Rates2009
    
    $
    (3,788
    )
    
    
    47.26
    %2008
    
    
    827
    
    
    
    20.14
    %
   43




---



##### Table of Contents



Discussion of Financial Condition
 General Discussion of Our Financial Condition
  2009
    
    
    2008
    
    
    $ change
    
    
    % changeCash and equivalents
    
    $
    14,105
    
    
    $
    14,590
    
    
    $
    (485
    )
    
    
    -3.32
    %Loans
    
    
    407,704
    
    
    
    420,429
    
    
    
    (12,725
    )
    
    
    -3.03
    %Allowance for loan losses
    
    
    11,353
    
    
    
    5,292
    
    
    
    6,061
    
    
    
    114.53
    %Investment securities
    
    
    146,534
    
    
    
    126,695
    
    
    
    19,839
    
    
    
    15.66
    %Premises and equipment
    
    
    33,709
    
    
    
    31,484
    
    
    
    2,225
    
    
    
    7.07
    %Other real estate owned
    
    
    14,575
    
    
    
    9,444
    
    
    
    5,131
    
    
    
    54.33
    %Total assets
    
    
    636,784
    
    
    
    621,373
    
    
    
    15,411
    
    
    
    2.48
    %Noninterest-bearing demand deposits
    
    
    47,601
    
    
    
    44,652
    
    
    
    2,949
    
    
    
    6.60
    %Interest-bearing demand and savings deposits
    
    
    173,769
    
    
    
    163,565
    
    
    
    10,204
    
    
    
    6.24
    %Time deposits
    
    
    289,244
    
    
    
    246,449
    
    
    
    42,795
    
    
    
    17.36
    %Total deposits
    
    
    510,614
    
    
    
    454,666
    
    
    
    55,948
    
    
    
    12.31
    %Federal funds purchased
    
    
    
    
    
    
    22,580
    
    
    
    (22,580
    )
    
    
    -100.00
    %Federal Home Loan Bank advances
    
    
    62,900
    
    
    
    72,900
    
    
    
    (10,000
    )
    
    
    -13.72
    %Subordinated debentures
    
    
    13,403
    
    
    
    13,403
    
    
    
    
    
    
    
    0.00
    %Total liabilities
    
    
    589,415
    
    
    
    570,379
    
    
    
    19,036
    
    
    
    3.34
    %Accumulated other comprehensive income
(loss)
    
    
    283
    
    
    
    (148
    )
    
    
    431
    
    
    
    291.22
    %Total shareholders equity
    
    $
    47,369
    
    
    $
    50,994
    
    
    $
    (3,625
    )
    
    
    -7.11
    %
 Loans
   44




---



##### Table of Contents



Loan Portfolio
 At December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(in thousands)Commercial, financial, agricultural
    
    $
    30,387
    
    
    $
    37,632
    
    
    $
    35,929
    
    
    $
    26,062
    
    
    $
    15,375Real estate  construction,
development
    
    
    99,771
    
    
    
    142,370
    
    
    
    150,844
    
    
    
    137,989
    
    
    
    80,719Real estate  mortgage
    
    
    270,622
    
    
    
    231,999
    
    
    
    201,011
    
    
    
    173,085
    
    
    
    144,898Consumer and other
    
    
    6,924
    
    
    
    8,428
    
    
    
    9,890
    
    
    
    7,572
    
    
    
    7,872Less allowance for loan losses
    
    
    11,353
    
    
    
    5,292
    
    
    
    3,974
    
    
    
    3,524
    
    
    
    2,634Loans, net
    
    $
    396,351
    
    
    $
    415,137
    
    
    $
    393,700
    
    
    $
    341,184
    
    
    $
    246,230
  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
    
    $
    11,409
    
    
    $
    7,883
    
    
    $
    6,212
    
    
    $
    4,105Real estate  construction,
development
    
    
    62,063
    
    
    
    27,805
    
    
    
    9,748
    
    
    
    2,735Real estate  mortgage
    
    
    125,849
    
    
    
    97,166
    
    
    
    28,198
    
    
    
    17,897Consumer and other
    
    
    3,852
    
    
    
    1,829
    
    
    
    721
    
    
    
    232Total
    
    $
    203,173
    
    
    $
    134,683
    
    
    $
    44,879
    
    
    $
    24,969
   45




---



##### Table of Contents



Past Due Loans and Non-Performing Assets
  December 31,2009
    
    
    2008Balance
    
    
    % of total loans
    
    
    Balance
    
    
    % of total loans($ in thousands)Construction, land
development
and other land loans
    
    $
    656
    
    
    
    0.16
    %
    
    $
    11,081
    
    
    
    2.64
    %Commercial real estate
    
    
    126
    
    
    
    0.03
    %
    
    
    1,170
    
    
    
    0.28
    %Consumer real estate
    
    
    1,125
    
    
    
    0.28
    %
    
    
    2,312
    
    
    
    0.55
    %Commercial loans
    
    
    138
    
    
    
    0.03
    %
    
    
    201
    
    
    
    0.05
    %Consumer loans
    
    
    81
    
    
    
    0.02
    %
    
    
    88
    
    
    
    0.02
    %Total
    
    $
    2,126
    
    
    
    0.52
    %
    
    $
    14,852
    
    
    
    3.53
    %
   46




---



##### Table of Contents



Past due 90 days
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other real
    
    
    Totalor more and
    
    
    % of total
    
    
    Nonaccrual
    
    
    % of total
    
    
    estate
    
    
    non-performingstill accruing
    
    
    loans
    
    
    loans
    
    
    loans
    
    
    owned
    
    
    assets($ in thousands)As of December 31, 2009Construction, land development and other land loans
    
    $
    43
    
    
    
    0.01
    %
    
    $
    21,596
    
    
    
    5.30
    %
    
    $
    5,834
    
    
    $
    27,473Commercial real estate
    
    
    
    
    
    
    0.00
    %
    
    
    11,003
    
    
    
    2.70
    %
    
    
    1,093
    
    
    
    12,096Consumer real estate
    
    
    
    
    
    
    0.00
    %
    
    
    7,864
    
    
    
    1.93
    %
    
    
    7,648
    
    
    
    15,512Commercial loans
    
    
    
    
    
    
    0.00
    %
    
    
    75
    
    
    
    0.02
    %
    
    
    
    
    
    
    75Consumer loans
    
    
    25
    
    
    
    0.01
    %
    
    
    10
    
    
    
    0.00
    %
    
    
    
    
    
    
    35Total
    
    $
    68
    
    
    
    0.02
    %
    
    $
    40,548
    
    
    
    9.95
    %
    
    $
    14,575
    
    
    $
    55,191Total non-performing
loans to total loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.96
    %Total non-performing
assets to total loans
plus other real
estate owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.07
    %As of December 31, 2008Construction, land
development
and other land loans
    
    $
    
    
    
    
    0.00
    %
    
    $
    9,185
    
    
    
    2.18
    %
    
    $
    2,859
    
    
    $
    12,044Commercial real estate
    
    
    
    
    
    
    0.00
    %
    
    
    136
    
    
    
    0.03
    %
    
    
    6,475
    
    
    
    6,611Consumer real estate
    
    
    122
    
    
    
    0.03
    %
    
    
    2,390
    
    
    
    0.57
    %
    
    
    110
    
    
    
    2,622Commercial loans
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    Consumer loans
    
    
    6
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    6Total
    
    $
    128
    
    
    
    0.03
    %
    
    $
    11,711
    
    
    
    2.79
    %
    
    $
    9,444
    
    
    $
    21,283Total non-performing
loans to total loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.82
    %Total non-performing
assets to total loans
plus other
real estate owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.95
    %
    47




---



##### Table of Contents



2009
    
    
    2008(in thousands)Interest income that would have been recorded on
nonaccrual loans under original terms
    
    $
    1,359
    
    
    $
    748Interest income that was recorded on nonaccrual
loans
    
    
    45
    
    
    
    2
       48




---



##### Table of Contents



Allowance for Loan Losses
      49




---



##### Table of Contents



December 31, 2009
    
    
    December 31, 2008Impaired
    
    
    % of total
    
    
    Impaired
    
    
    % of totalLoans
    
    
    loans
    
    
    Loans
    
    
    loans($ in thousands)Construction, land development
and other land loans
    
    $
    27,213
    
    
    
    6.67
    %
    
    $
    1,907
    
    
    
    0.45
    %Commercial real estate
    
    
    13,224
    
    
    
    3.24
    %
    
    
    616
    
    
    
    0.15
    %Consumer real estate
    
    
    22,616
    
    
    
    5.55
    %
    
    
    824
    
    
    
    0.20
    %Other loans
    
    
    94
    
    
    
    0.02
    %
    
    
    
    
    
    
    0.00
    %Total
    
    $
    63,147
    
    
    
    15.49
    %
    
    $
    3,347
    
    
    
    0.80
    %
  50




---



##### Table of Contents



51




---



##### Table of Contents



At December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(dollars in thousands)Average balance of loans outstanding
    
    $
    415,522
    
    
    $
    417,124
    
    
    $
    373,237
    
    
    $
    292,950
    
    
    $
    227,910Balance of allowance for loan losses at beginning of
year
    
    
    5,292
    
    
    
    3,974
    
    
    
    3,524
    
    
    
    2,634
    
    
    
    2,281Charge-offs:Commercial, financial, agricultural
    
    
    328
    
    
    
    198
    
    
    
    43
    
    
    
    
    
    
    
    Real estate  construction, development
    
    
    3,054
    
    
    
    686
    
    
    
    158
    
    
    
    1
    
    
    
    24Real estate  mortgage
    
    
    2,220
    
    
    
    41
    
    
    
    250
    
    
    
    25
    
    
    
    40Consumer and other
    
    
    289
    
    
    
    98
    
    
    
    110
    
    
    
    23
    
    
    
    45Recoveries:Commercial, financial, agricultural
    
    
    1
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    Real estate  construction, development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Real estate  mortgage
    
    
    251
    
    
    
    11
    
    
    
    15
    
    
    
    18
    
    
    
    10Consumer and other
    
    
    27
    
    
    
    12
    
    
    
    14
    
    
    
    5
    
    
    
    6Net charge-offs
    
    
    5,612
    
    
    
    957
    
    
    
    532
    
    
    
    25
    
    
    
    93Additions to allowance charges to operations
    
    
    11,673
    
    
    
    2,275
    
    
    
    982
    
    
    
    915
    
    
    
    446Balance of allowance for loan losses at end of year
    
    
    11,353
    
    
    
    5,292
    
    
    
    3,974
    
    
    
    3,524
    
    
    
    2,634Ratio of net loan charge-offs during the year to average
loans outstanding during the year
    
    
    1.35
    %
    
    
    0.23
    %
    
    
    0.14
    %
    
    
    0.01
    %
    
    
    0.04
    %
  At December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    LoanCategory as
    
    
    
    
    
    
    Category as
    
    
    
    
    
    
    Category as
    
    
    
    
    
    
    Category as
    
    
    
    
    
    
    Category as% of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans(dollars in thousands)Commercial
    
    $
    557
    
    
    
    7.45
    %
    
    $
    1,289
    
    
    
    8.95
    %
    
    $
    968
    
    
    
    9.03
    %
    
    $
    418
    
    
    
    7.56
    %
    
    $
    225
    
    
    
    3.16
    %Real estate 
construction,
development
    
    
    5,844
    
    
    
    24.47
    %
    
    
    2,131
    
    
    
    33.86
    %
    
    
    1,600
    
    
    
    37.93
    %
    
    
    1,331
    
    
    
    40.03
    %
    
    
    837
    
    
    
    32.43
    %Real estate  mortgage
    
    
    4,798
    
    
    
    66.38
    %
    
    
    1,599
    
    
    
    55.18
    %
    
    
    1,201
    
    
    
    50.55
    %
    
    
    1,669
    
    
    
    50.21
    %
    
    
    1,502
    
    
    
    58.23
    %Consumer, other
    
    
    154
    
    
    
    1.70
    %
    
    
    273
    
    
    
    2.01
    %
    
    
    205
    
    
    
    2.49
    %
    
    
    106
    
    
    
    2.20
    %
    
    
    70
    
    
    
    6.18
    %Total
    
    $
    11,353
    
    
    
    100.00
    %
    
    $
    5,292
    
    
    
    100.00
    %
    
    $
    3,974
    
    
    
    100.00
    %
    
    $
    3,524
    
    
    
    100.00
    %
    
    $
    2,634
    
    
    
    100.00
    %
 Securities
   52




---



##### Table of Contents



At December 31,2009
    
    
    2008
    
    
    2007(in thousands)Securities available for sale:U.S. Treasury and government agencies
and corporations
    
    $
    10,149
    
    
    $
    5,751
    
    
    $
    9,179Corporate securities
    
    
    
    
    
    
    175
    
    
    
    175Mortgage-backed securities
    
    
    114,057
    
    
    
    98,045
    
    
    
    57,975Obligations of states and political subdivisions
    
    
    20,124
    
    
    
    20,607
    
    
    
    13,812Total
    
    
    144,330
    
    
    
    124,578
    
    
    
    81,141Securities held to maturity:Obligations of states and political subdivisions
    
    
    2,204
    
    
    
    2,117
    
    
    
    2,021
  53




---



##### 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
    
    $
    6,249
    
    
    
    0.11
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    3,900
    
    
    
    4.78
    %
    
    $
    10,149
    
    
    
    1.91
    %Mortgage-backed securities
    
    
    171
    
    
    
    5.13
    %
    
    
    89,329
    
    
    
    4.42
    %
    
    
    9,356
    
    
    
    4.69
    %
    
    
    15,201
    
    
    
    4.73
    %
    
    
    114,057
    
    
    
    4.48
    %Obligations of states and
political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,027
    
    
    
    3.95
    %
    
    
    14,097
    
    
    
    4.85
    %
    
    
    20,124
    
    
    
    4.58
    %Total available for sale
    
    
    6,420
    
    
    
    0.25
    %
    
    
    89,329
    
    
    
    4.42
    %
    
    
    15,383
    
    
    
    4.40
    %
    
    
    33,198
    
    
    
    4.79
    %
    
    
    144,330
    
    
    
    4.31
    %Securities held to
maturity:Obligations of states and
political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690
    
    
    
    4.65
    %
    
    
    1,514
    
    
    
    4.38
    %
    
    
    2,204
    
    
    
    4.47
    %Total held to maturity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    690
    
    
    
    4.65
    %
    
    
    1,514
    
    
    
    4.38
    %
    
    
    2,204
    
    
    
    4.47
    %Total securities
    
    
    6,420
    
    
    
    0.25
    %
    
    
    89,329
    
    
    
    4.42
    %
    
    
    16,073
    
    
    
    4.41
    %
    
    
    34,712
    
    
    
    4.77
    %
    
    
    146,534
    
    
    
    4.32
    %
  Deposits
   2009
    
    
    2008
    
    
    $ change
    
    
    % changeNoninterest-bearing demand
deposits
    
    $
    47,601
    
    
    $
    44,652
    
    
    $
    2,949
    
    
    
    6.60
    %Total noninterest-bearing
deposits
    
    
    47,601
    
    
    
    44,652
    
    
    
    2,949
    
    
    
    6.60
    %NOW accounts
    
    
    112,440
    
    
    
    110,420
    
    
    
    2,020
    
    
    
    1.83
    %Money market accounts
    
    
    40,809
    
    
    
    37,167
    
    
    
    3,642
    
    
    
    9.80
    %Savings
    
    
    20,520
    
    
    
    15,978
    
    
    
    4,542
    
    
    
    28.43
    %Brokered deposits
    
    
    69,871
    
    
    
    62,478
    
    
    
    7,393
    
    
    
    11.83
    %Time deposits
    
    
    219,373
    
    
    
    183,971
    
    
    
    35,402
    
    
    
    19.24
    %Total interest-bearing deposits
    
    
    463,013
    
    
    
    410,014
    
    
    
    52,999
    
    
    
    12.93
    %Total deposits
    
    $
    510,614
    
    
    $
    454,666
    
    
    $
    55,948
    
    
    
    12.31
    %
   54




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##### Table of Contents



2009
    
    
    2008
    
    
    2007Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(dollars in thousands)Noninterest-bearing demand
deposits
    
    $
    45,761
    
    
    
    0
    %
    
    $
    48,331
    
    
    
    0
    %
    
    $
    53,336
    
    
    
    0
    %Interest-bearing demand deposits
    
    
    150,384
    
    
    
    1.23
    %
    
    
    142,020
    
    
    
    2.16
    %
    
    
    127,704
    
    
    
    3.88
    %Savings deposits
    
    
    17,340
    
    
    
    1.39
    %
    
    
    13,815
    
    
    
    1.95
    %
    
    
    8,673
    
    
    
    1.05
    %Time deposits
    
    
    304,715
    
    
    
    2.67
    %
    
    
    224,055
    
    
    
    4.28
    %
    
    
    196,654
    
    
    
    5.10
    %Total
    
    $
    518,200
    
    
    
    
    
    
    $
    428,221
    
    
    
    
    
    
    $
    386,367
  (dollars in thousands)Three months or less
    
    $
    50,418Over three months through six months
    
    
    31,459Over six months through 12 months
    
    
    57,412Over 12 months
    
    
    28,957Total
    
    $
    168,246
    55




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##### Table of Contents



Shareholders Equity
  Interest Rate Sensitivity Management
       56




---



##### Table of Contents



57




---



##### Table of Contents



Analysis of Interest Sensitivity
As of December 31, 2009  (dollars in thousands)
 0 - 3
    
    
    3 - 12
    
    
    1 - 3
    
    
    Over threemonths
    
    
    months
    
    
    years
    
    
    years
    
    
    TotalFederal funds sold
    
    $
    2,354
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,354Securities
    
    
    6,060
    
    
    
    24,248
    
    
    
    24,169
    
    
    
    92,057
    
    
    
    146,534Loans (1)
    
    
    212,776
    
    
    
    60,885
    
    
    
    94,702
    
    
    
    39,341
    
    
    
    407,704Total interest-earning assets
    
    
    221,190
    
    
    
    85,133
    
    
    
    118,871
    
    
    
    131,398
    
    
    
    556,592Interest-bearing liabilities:Interest-bearing demand deposits
    
    
    153,249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153,249Savings
    
    
    20,520
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,520Time deposits
    
    
    75,888
    
    
    
    161,097
    
    
    
    50,847
    
    
    
    1,412
    
    
    
    289,244Other borrowings
    
    
    1,776
    
    
    
    200
    
    
    
    12,700
    
    
    
    50,000
    
    
    
    64,676Total interest-bearing liabilities
    
    
    251,433
    
    
    
    161,297
    
    
    
    63,547
    
    
    
    51,412
    
    
    
    527,689Interest rate sensitivity gap
    
    $
    (30,243
    )
    
    $
    (76,164
    )
    
    $
    55,324
    
    
    $
    79,986
    
    
    $
    28,903Cumulative interest rate sensitivity gap
    
    $
    (30,243
    )
    
    $
    (106,407
    )
    
    $
    (51,083
    )
    
    $
    28,903Interest rate sensitivity gap ratio
    
    
    -13.67
    %
    
    
    -89.46
    %
    
    
    46.54
    %
    
    
    60.87
    %Cumulative interest rate sensitivity
gap ratio
    
    
    -13.67
    %
    
    
    -34.74
    %
    
    
    -12.01
    %
    
    
    5.19
    %
 
 (1)
    
    Includes nonaccrual loans    58




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##### Table of Contents



Return on Assets and Equity
  For the Years EndedAt December 31,2009
    
    
    2008
    
    
    2007Return on average assets
    
    
    -0.64
    %
    
    
    0.56
    %
    
    
    0.77
    %Return on average equity
    
    
    -8.14
    %
    
    
    6.48
    %
    
    
    9.81
    %Average equity as a percentage of average assets
    
    
    7.88
    %
    
    
    8.68
    %
    
    
    7.83
    %Cash dividend payout ratio
    
    
    0.00
    %
    
    
    30.65
    %
    
    
    0.00
    %
 Capital Adequacy and Liquidity
   Regulatory Capital Requirements
    59




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##### Table of Contents



December 31,2009
    
    
    2008Tier 1 Risk-Based Capital
    
    
    12.89
    %
    
    
    13.34
    %Regulatory minimum
    
    
    4.00
    %
    
    
    4.00
    %Total Risk-Based Capital
    
    
    14.16
    %
    
    
    14.44
    %Regulatory minimum
    
    
    8.00
    %
    
    
    8.00
    %Tier 1 Leverage
    
    
    9.23
    %
    
    
    10.51
    %Regulatory minimum
    
    
    4.00
    %
    
    
    4.00
    %
  December 31,2009
    
    
    2008Tier 1 Risk-Based Capital
    
    
    12.75
    %
    
    
    13.19
    %Regulatory minimum
    
    
    4.00
    %
    
    
    4.00
    %Well-capitalized
    
    
    6.00
    %
    
    
    6.00
    %Total Risk-Based Capital
    
    
    14.02
    %
    
    
    14.29
    %Regulatory minimum
    
    
    8.00
    %
    
    
    8.00
    %Well-capitalized
    
    
    10.00
    %
    
    
    10.00
    %Tier 1 Leverage
    
    
    9.14
    %
    
    
    10.41
    %Regulatory minimum
    
    
    4.00
    %
    
    
    4.00
    %Well-capitalized
    
    
    5.00
    %
    
    
    5.00
    %
  60




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##### Table of Contents



Off-Balance Sheet Arrangements
  Commitments and Lines of Credit
   61




---



##### Table of Contents



2009
    
    
    2008(dollars in thousands)Commitments to extend credit
    
    $
    50,702
    
    
    $
    82,097Standby letters of credit
    
    
    5,801
    
    
    
    9,885Totals
    
    $
    56,503
    
    
    $
    91,982
  Effects of Inflation
   Significant Accounting Changes
  
 ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
   62




---



##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A(T).
    
    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
     63




---



##### Table of Contents



ITEM 9B.
    
    OTHER INFORMATION
  
 PART III
 
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11.
    
    EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
   
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
   64




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##### Table of Contents



ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 PART IV
 
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    Exhibit No.
    
    Description of Exhibit2.1
    
    
    Plan of Reorganization dated March 28, 2003, by and between
the Company and Mountain National Bank (included as Exhibit
2.1 to the Report on Form 8-K12G3 of the Company, dated July
12, 2003 (File No. 000-49912), previously filed with the
Commission and incorporated herein by reference).2.2
    
    
    Amendment to Plan of Reorganization dated July 1, 2003
(included as Exhibit 2.2 to the Report on Form 8-K12G3 of the
Company, dated July 12, 2003 (File No. 000-49912), previously
filed with the Commission and incorporated herein by
reference).3.1
    
    
    Charter of Incorporation of the Company, as amended (Restated
for SEC filing purposes only).3.2
    
    
    Amended and Restated Bylaws of the Company, as amended
(included as Exhibit 3.1 to the Report on Form 8-K of the
Company, dated March 31, 2010 (File No. 000-49912), previously
filed with the Commission and incorporated herein by
reference).10.1
    
    
    Stock Option Plan of the Company, as amended (included as
Exhibit 10.1 to the Report on Form 8-K of the Company, dated
May 19, 2006 (File No. 000-49912), previously filed with the
Commission and incorporated herein by reference)*10.2
    
    
    Stock Option Agreement of Dwight B. Grizzell (assumed by
Company) (included as Exhibit 10.3 to the Companys Form
10-KSB for the year ended December 31, 2002 and incorporated
herein by reference)*10.3
    
    Summary Description of Director and Named Executive Officer
Compensation Arrangements*
  65




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##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.4
    
    
    Form of Warrant Agreement (included as Exhibit 10.5 to the
Companys Form SB-2/A filed with the Commission on August 23,
2005)10.5
    
    
    Employment Agreement dated as of May 15, 2009 by and among
Mountain National Bank, Mountain National Bancshares, Inc. and
Grace McKinzie (included as Exhibit 10.1 to the Report on Form
8-K of the Company, dated March 31, 2010 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)*10.6
    
    
    Employment Agreement dated as of May 28, 2009 by and among
Mountain National Bank, Mountain National Bancshares, Inc. and
Michael Brown (included as Exhibit 10.2 to the Report on Form
8-K of the Company, dated March 31, 2010 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)*10.7
    
    
    Employment Agreement dated as of May 18, 2009 by and among
Mountain National Bank, Mountain National Bancshares, Inc. and
Richard Hubbs (included as Exhibit 10.3 to the Report on Form
8-K of the Company, dated March 31, 2010 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)*10.8
    
    
    Amended and Restated Salary Continuation Agreement, dated
January 19, 2007, by and between Mountain National Bank and
Dwight Grizzell. (included as Exhibit 10.8 to the Companys
Form 10-K for the year ended December 31, 2007 and
incorporated herein by reference)*10.9
    
    
    Amendment, dated November 19, 2007, to Amended and Restated
Salary Continuation Agreement, by and between Mountain
National Bank and Dwight Grizzell. (included as Exhibit 10.9
to the Companys Form 10-K for the year ended December 31,
2007 and incorporated herein by reference)*10.10
    
    
    Amended and Restated Salary Continuation Agreement, dated
January 19, 2007, by and between Mountain National Bank and
Michael Brown. (included as Exhibit 10.10 to the Companys
Form 10-K for the year ended December 31, 2007 and
incorporated herein by reference)*10.11
    
    
    Amendment, dated November 19, 2007, to Amended and Restated
Salary Continuation Agreement, by and between Mountain
National Bank and Michael Brown. (included as Exhibit 10.11 to
the Companys Form 10-K for the year ended December 31, 2007
and incorporated herein by reference)*10.12
    
    
    Amended and Restated Salary Continuation Agreement, dated
January 19, 2007, by and between Mountain National Bank and
Grace McKinzie. (included as Exhibit 10.12 to the Companys
Form 10-K for the year ended December 31, 2007 and
incorporated herein by reference)*10.13
    
    
    Amendment, dated November 19, 2007, to Amended and Restated
Salary Continuation Agreement, by and between Mountain
National Bank and Grace McKinzie. (included as Exhibit 10.13
to the Companys Form 10-K for the year ended December 31,
2007 and incorporated herein by reference)*
  66




---



##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.14
    
    
    Agreement, dated June 2, 2009, by and between Mountain
National Bank and the Office of the Comptroller of the
Currency. (included as Exhibit 10.1 to the Report on Form 8-K
of the Company, dated June 5, 2009, (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)21
    
    
    Subsidiaries of the Company23
    
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    
    Certificate of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    
    Certificate of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    
    Certificate of CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    
    Certificate of CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 *
    
    Denotes management contract or compensatory plan or arrangement.   67




---



##### Table of Contents



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

Dwight B. GrizzellPresident and Chief Executive OfficerDate: March 31, 2010
  /s/ Dwight B. Grizzell

Dwight B. Grizzell, President,
    
    Date: March 31, 2010Chief Executive Officer and Director/s/ Richard A. Hubbs

Richard A. Hubbs, Senior Vice President and
    
    Date: March 31, 2010Chief Financial Officer (Principal Financialand Accounting Officer)/s/ James E. Bookstaff

James E. Bookstaff, Director
    
    Date: March 31, 2010/s/ Gary A. Helton

Gary A. Helton, Director
    
    Date: March 31, 2010/s/ Charlie R. Johnson

Charlie R. Johnson, Director
    
    Date: March 31, 2010/s/ Sam L. Large

Sam L. Large, Director
    
    Date: March 31, 2010/s/ Jeffrey J. Monson

Jeffrey J. Monson, Director
    
    Date: March 31, 2010/s/ Linda N. Ogle

Linda N. Ogle, Director
    
    Date: March 31, 2010/s/ Michael C. Ownby

Michael C. Ownby, Director
    
    Date: March 31, 2010/s/ John M. Parker

John M. Parker, Director
    
    Date: March 31, 2010/s/ Ruth Reams

Ruth Reams, Director
    
    Date: March 31, 2010
  68




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##### Table of Contents



Mountain National Bancshares, Inc. and Subsidiaries
 Consolidated Financial Report
 December 31, 2009




---



##### Table of Contents



PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-1CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheets
    
    
    F-2Consolidated statements of operations
    
    
    F-3Consolidated statements of changes in shareholders equity
    
    
    F-4Consolidated statements of cash flows
    
    
    F-5Notes to consolidated financial statements
    
    
    F-6  F-46




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    
   F-1




---



##### Table of Contents



2009
    
    
    2008ASSETSCash and due from banks
    
    $
    11,750,723
    
    
    $
    14,013,675Federal funds sold
    
    
    2,353,913
    
    
    
    576,000Total cash and cash equivalents
    
    
    14,104,636
    
    
    
    14,589,675Securities available for sale
    
    
    144,330,068
    
    
    
    124,578,359Securities held to maturity, fair value $2,208,236 at December 31, 2009 and $1,813,410
at December 31, 2008
    
    
    2,204,303
    
    
    
    2,117,044Restricted investments, at cost
    
    
    3,816,050
    
    
    
    3,862,518Loans, net of allowance for loan losses of $11,353,438 at December 31, 2009 and
$5,292,028 at December 31, 2008
    
    
    396,351,008
    
    
    
    415,137,230Investment in partnership
    
    
    4,198,675
    
    
    
    4,117,962Premises and equipment
    
    
    33,709,282
    
    
    
    31,484,233Accrued interest receivable
    
    
    3,045,290
    
    
    
    2,737,819Cash surrender value of life insurance
    
    
    11,366,270
    
    
    
    11,078,708Other real estate owned
    
    
    14,575,368
    
    
    
    9,444,150Other assets
    
    
    9,083,366
    
    
    
    2,225,501Total assets
    
    $
    636,784,316
    
    
    $
    621,373,199LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing demand deposits
    
    $
    47,600,944
    
    
    $
    44,652,008NOW accounts
    
    
    112,440,413
    
    
    
    110,420,061Money market accounts
    
    
    40,808,892
    
    
    
    37,166,820Savings accounts
    
    
    20,519,998
    
    
    
    15,977,609Time deposits
    
    
    289,243,894
    
    
    
    246,449,448Total deposits
    
    
    510,614,141
    
    
    
    454,665,946Federal funds purchased
    
    
    
    
    
    
    22,580,000Securities sold under agreements to repurchase
    
    
    1,776,402
    
    
    
    4,331,865Accrued interest payable
    
    
    605,936
    
    
    
    1,022,921Subordinated debentures
    
    
    13,403,000
    
    
    
    13,403,000Federal Home Loan Bank advances
    
    
    62,900,000
    
    
    
    72,900,000Other liabilities
    
    
    115,682
    
    
    
    1,475,714Total liabilities
    
    
    589,415,161
    
    
    
    570,379,446Commitments and contingenciesShareholders equity:Common stock, $1.00 par value; 10,000,000 shares authorized; 2,631,611
issued and outstanding
    
    
    2,631,611
    
    
    
    2,631,611Additional paid-in capital
    
    
    42,125,828
    
    
    
    41,952,632Retained earnings
    
    
    2,328,702
    
    
    
    6,557,097Accumulated other comprehensive income (loss)
    
    
    283,014
    
    
    
    (147,587
    )Total shareholders equity
    
    
    47,369,155
    
    
    
    50,993,753Total liabilities and shareholders equity
    
    $
    636,784,316
    
    
    $
    621,373,199
   F-2




---



##### Table of Contents



2009
    
    
    2008INTEREST INCOMELoans
    
    $
    25,072,166
    
    
    $
    29,920,558Taxable securities
    
    
    5,219,060
    
    
    
    4,434,395Tax-exempt securities
    
    
    1,053,433
    
    
    
    788,792Federal funds sold and deposits in other banks
    
    
    24,710
    
    
    
    49,246Total interest income
    
    
    31,369,369
    
    
    
    35,192,991INTEREST EXPENSEDeposits
    
    
    10,247,527
    
    
    
    12,914,535Federal funds purchased
    
    
    36,020
    
    
    
    314,216Repurchase agreements
    
    
    91,022
    
    
    
    129,080Federal Home Loan Bank advances
    
    
    2,592,048
    
    
    
    2,813,163Subordinated debentures
    
    
    392,016
    
    
    
    763,196Total interest expense
    
    
    13,358,633
    
    
    
    16,934,190Net interest income
    
    
    18,010,736
    
    
    
    18,258,801Provision for loan losses
    
    
    11,672,802
    
    
    
    2,275,000Net interest income after provision for loan losses
    
    
    6,337,934
    
    
    
    15,983,801NONINTEREST INCOMEService charges on deposit accounts
    
    
    2,326,614
    
    
    
    1,424,062Other fees and commissions
    
    
    1,262,244
    
    
    
    1,222,454Gain on sale of mortgage loans
    
    
    146,913
    
    
    
    162,740Investment gains and losses, net
    
    
    2,558,612
    
    
    
    179,274Other than temporary lossTotal impairment loss
    
    
    (405,846
    )
    
    
    Loss recognized in other comprehensive income (loss)
    
    
    (58,478
    )
    
    
    Net impairment recognized in earnings
    
    
    (347,368
    )
    
    
    Other real estate gains and losses, net
    
    
    (1,478,877
    )
    
    
    758,976Other noninterest income
    
    
    395,248
    
    
    
    577,932Total noninterest income
    
    
    4,863,386
    
    
    
    4,325,438NONINTEREST EXPENSESalaries and employee benefits
    
    
    9,670,008
    
    
    
    9,232,079Occupancy expenses
    
    
    1,698,987
    
    
    
    1,323,860FDIC assessment expense
    
    
    1,537,439
    
    
    
    353,606Other operating expenses
    
    
    6,311,308
    
    
    
    5,292,699Total noninterest expense
    
    
    19,217,742
    
    
    
    16,202,244Income (loss) before income taxes
    
    
    (8,016,422
    )
    
    
    4,106,995Income tax expense (benefit)
    
    
    (3,788,027
    )
    
    
    826,787Net income (loss)
    
    $
    (4,228,395
    )
    
    $
    3,280,208EARNINGS (LOSS) PER SHAREBasic
    
    $
    (1.61
    )
    
    $
    1.24Diluted
    
    $
    (1.61
    )
    
    $
    1.24
   F-3




---



##### Table of Contents



AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalComprehensive
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersIncome (Loss)
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    EquityBALANCE, January 1, 2008
    
    
    
    
    
    $
    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 loss 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
    )
    
    
    50,993,753Share-based compensation
    
    
    
    
    
    
    
    
    
    
    102,500
    
    
    
    
    
    
    
    
    
    
    
    102,500Tax benefit from exercise of options
    
    
    
    
    
    
    
    
    
    
    70,696
    
    
    
    
    
    
    
    
    
    
    
    70,696Comprehensive income:Net income (loss)
    
    
    (4,228,395
    )
    
    
    
    
    
    
    
    
    
    
    (4,228,395
    )
    
    
    
    
    
    
    (4,228,395
    )Other comprehensive income, net of tax:Unrealized holding gain on
securities available for
sale, net of
reclassification adjustment
    
    
    430,601
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    430,601
    
    
    
    430,601Total comprehensive loss
    
    $
    (3,797,794
    )BALANCE, December 31, 2009
    
    
    
    
    
    $
    2,631,611
    
    
    $
    42,125,828
    
    
    $
    2,328,702
    
    
    $
    283,014
    
    
    $
    47,369,155
   F-4




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##### Table of Contents



2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    (4,228,395
    )
    
    $
    3,280,208Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation
    
    
    1,430,157
    
    
    
    1,248,204Net realized gains on securities available for sale
    
    
    (2,558,612
    )
    
    
    (179,274
    )Securities impairment loss recognized in earnings
    
    
    347,368
    
    
    
    Net amortization on available for sale securities
    
    
    790,954
    
    
    
    124,466Increase in held to maturity due to accretion
    
    
    (87,259
    )
    
    
    (95,717
    )Provision for loan losses
    
    
    11,672,802
    
    
    
    2,275,000Net loss on other real estate
    
    
    1,478,877
    
    
    
    62,120Gain on sale of land
    
    
    
    
    
    
    (821,096
    )Deferred income taxes
    
    
    (3,877,978
    )
    
    
    (611,624
    )Gross mortgage loans originated for sale
    
    
    (20,078,046
    )
    
    
    (19,015,218
    )Gross proceeds from sale of mortgage loans
    
    
    20,413,759
    
    
    
    19,381,754Gain on sale of mortgage loans
    
    
    (146,913
    )
    
    
    (162,740
    )Increase in cash surrender value of life insurance
    
    
    (287,562
    )
    
    
    (428,915
    )Investment in partnership
    
    
    (80,713
    )
    
    
    (22,877
    )Share-based compensation
    
    
    102,500
    
    
    
    86,000Tax benefit from exercise of options
    
    
    (70,696
    )
    
    
    (202,893
    )Change in operating assets and liabilities:Accrued interest receivable
    
    
    (307,471
    )
    
    
    (36,417
    )Accrued interest payable
    
    
    (416,985
    )
    
    
    (217,196
    )Other assets and liabilities
    
    
    (6,620,253
    )
    
    
    929,901Net cash (used) provided by operating
activities
    
    
    (2,524,466
    )
    
    
    5,593,686CASH FLOWS FROM INVESTING ACTIVITIESActivity in available-for-sale securities:Proceeds from sales
    
    
    89,957,394
    
    
    
    16,149,538Proceeds from maturities, prepayments and calls
    
    
    142,591,220
    
    
    
    28,055,036Purchases
    
    
    (250,277,064
    )
    
    
    (87,456,210
    )Purchases of other investments
    
    
    (125,900
    )
    
    
    (205,900
    )Loan originations and principal collections, net
    
    
    (5,558,028
    )
    
    
    (32,618,031
    )Purchase of premises and equipment
    
    
    (3,655,206
    )
    
    
    (7,802,054
    )Proceeds from sale of land
    
    
    
    
    
    
    1,317,955Purchase of life insurance
    
    
    
    
    
    
    (2,000,000
    )Proceeds from sale of other real estate
    
    
    8,223,583
    
    
    
    673,719Net cash used in investing activities
    
    
    (18,844,001
    )
    
    
    (83,885,947
    )CASH FLOWS FROM FINANCING ACTIVITIESNet increase in deposits
    
    
    55,948,195
    
    
    
    50,291,735Proceeds from Federal Reserve/Federal Home Loan Bank advances
    
    
    31,000,000
    
    
    
    27,000,000Matured Federal Reserve/Federal Home Loan Bank advances
    
    
    (41,000,000
    )
    
    
    (19,456,418
    )Net increase (decrease) in federal funds purchased
    
    
    (22,580,000
    )
    
    
    21,280,000Net decrease in securities sold under
agreements to repurchase
    
    
    (2,555,463
    )
    
    
    (1,109,650
    )Proceeds from issuance of common stock, including options
    
    
    
    
    
    
    577,630Tax benefit from exercise of options
    
    
    70,696
    
    
    
    202,893Purchase of common stock
    
    
    
    
    
    
    (1,202,022
    )Cash dividends
    
    
    
    
    
    
    (1,030,812
    )Net cash provided by financing activities
    
    
    20,883,428
    
    
    
    76,553,356NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (485,039
    )
    
    
    (1,738,905
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    14,589,675
    
    
    
    16,328,580CASH AND CASH EQUIVALENTS, end of period
    
    $
    14,104,636
    
    
    $
    14,589,675SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for:Interest
    
    $
    13,775,618
    
    
    $
    17,151,386Income taxes
    
    
    520,000
    
    
    
    1,165,000Non-cash investing and financing activities:Transfers from loans to other real estate owned
    
    
    13,359,756
    
    
    
    8,701,852
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##### Table of Contents



Note 1  Summary of Significant Accounting Policies
 The accounting and reporting policies of Mountain National Bancshares, Inc. and its
subsidiaries (the Company) conform to generally accepted accounting principles in the
United States of America and practices within the banking industry. The policies that
materially affect financial position and results of operations are summarized as follows:
 Nature of operations and geographic concentration:
 The Company is a bank-holding company which owns all of the outstanding common stock of
Mountain National Bank (the Bank). The Bank provides a variety of financial services
through its branch offices located in Sevier and Blount County, Tennessee. The Banks
primary deposit products are demand deposits, savings accounts, and certificates of deposit.
Its primary lending products are commercial loans, real estate loans, and installment
loans.
 Principles of consolidation:
 The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. The Companys principal subsidiary is Mountain National Bank. All
material inter-company accounts and transactions have been eliminated in consolidation.
 Use of estimates:
 The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates and such differences could be material to the financial statements.
 The determination of the adequacy of the allowance for loan losses is based on estimates
that are particularly susceptible to significant changes in the economic environment and
market conditions. In connection with the determination of the estimated losses on loans,
management obtains independent appraisals for significant collateral.
 The Banks loans are generally secured by specific items of collateral including real
property, consumer assets, and business assets. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors ability to honor their contracts is
dependent on local economic conditions.
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##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 Due to the predominance of the tourism industry in Sevier County, a significant portion of
our commercial loan portfolio is concentrated within that industry. The predominance of the
tourism industry also makes our business more seasonal in nature than may be the case with
banks and financial institutions in other market areas.
 While management uses available information to recognize losses on loans, further reductions
in the carrying amounts of loans may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their examination
process, periodically review the estimated losses on loans. Such agencies may advise the
Bank to recognize additional losses based on their judgments about information available to
them at the time of their examination. Because of these factors, it is reasonably possible
that the estimated losses on loans may change materially in the near term. However, the
amount of the change that is reasonably possible cannot be estimated.
 Statements of cash flows:
 The Company considers all cash and amounts due from depository institutions with maturities
under 90 days and Federal Funds sold to be cash equivalents for purposes of the statements
of cash flows. Net cash flows are reported for customer loan and deposit transactions,
interest bearing deposits in other financial institutions, federal funds purchased and
repurchase agreements.
 Investment Securities:
 Debt securities are classified as held to maturity when the Bank has the positive intent and
ability to hold the securities to maturity. Securities held to maturity are carried at
amortized cost.
 Debt securities not classified as held to maturity are classified as available for sale.
Securities available for sale are carried at fair value with unrealized gains and losses,
net of taxes, reported in other comprehensive income (loss). Realized gains (losses) on
securities available for sale are included in other income (expense) and, when applicable,
are reported as a reclassification adjustment, net of tax, in other comprehensive income
(loss). Realized gains and losses on sales of securities are recorded in non-interest income
on the trade date and are determined on the specific-identification method.
 The amortization of premiums and accretion of discounts are recognized in interest income
using methods approximating the level-yield method over the period to maturity, without
anticipating prepayments, except for mortgage backed securities where prepayments are
anticipated.
  F-7




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##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 Restricted equity securities include common stock of the Federal Home Loan Bank of
Cincinnati and Federal Reserve Bank stock. These securities are carried at cost.
 Management evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis, and more frequently when economic or market conditions warrant such an
evaluation.
 Securities sold under agreements to repurchase:
 The Bank enters into sales of securities under agreements to repurchase identical securities
the next day.
 Loans:
 Loans are stated at unpaid principal balances, less the allowance for loan losses. Interest
income is accrued on the unpaid principal balance.
 The accrual of interest on real estate and commercial loans is discontinued at the time the
loan is 90 days delinquent unless the credit is well-secured and in process of collection.
Installment loans and other personal loans are typically charged off no later than 90 days
past due. Past due status is based on the contractual terms of the loan. In all cases, loans
are placed on nonaccrual or charged off at an earlier date if collection of principal or
interest is considered doubtful.
 All interest accrued but not collected for loans that are placed on nonaccrual or charged
off is reversed against interest income. The interest on these loans is accounted for on
the cash-basis or cost-recovery method, until qualifying for return to accrual. Generally,
loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably assured, which
usually requires a minimum of six months sustained repayment performance.
 Loans held for sale:
 Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or fair value, as determined by outstanding commitments from
investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged
to earnings. Mortgage servicing rights are sold with the related loan. Loans held
for sale totaled $0 and $188,800 at December 31, 2009 and 2008, respectively, and are
included with loans on the balance sheet.
  F-8




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##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 Allowance for loan losses:
 The allowance for loan losses is maintained at a level which, in managements judgment, is
adequate to absorb probable incurred credit losses inherent in the loan portfolio. The
amount of the allowance is based on managements evaluation of the collectability of the
loan portfolio, including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, economic conditions, and other risks
inherent in the portfolio. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of uncertainties associated with
local economic conditions, collateral values, and future cash flows on impaired loans, it is
reasonably possible that a material change could occur in the allowance for loan losses in
the near term. However, the amount of the change that is reasonably possible cannot be
estimated. The allowance is increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
 The allowance consists of specific and general components. The specific component relates to
loans that are individually classified as impaired or loans otherwise classified as
substandard or doubtful. The general component covers non-classified loans and is based on
historical loss experience adjusted for current factors.
 A loan is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Loans, for which the terms have been modified, and for which
the borrower is experiencing financial difficulties, are considered troubled debt
restructurings and classified as impaired. Factors considered by management in determining
impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the borrowers prior
payment record and the amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan by loan basis for commercial and construction loans
over $100,000 by either the present value of expected
future cash flows discounted at the loans effective interest rate, the loans obtainable
market price or the fair value of the collateral if the loan is collateral dependent.
Troubled debt restructurings are measured at the present value of estimated future cash
flows using the loans effective rate at inception. Large groups of smaller balance,
homogeneous loans are collectively evaluated for impairment.
  F-9




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##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 Reserve for unfunded commitments:
 The reserve for unfunded commitments represents the estimate for probable credit losses
inherent in these commitments to extend credit. Unfunded commitments to extend credit
include standby letters of credit and commitments to fund available lines of credit. The
process used to determine the reserve for unfunded commitments is consistent with the
process for determining the allowance for loan losses and the reserve, if any, is included
in other liabilities.
 Investment in Partnership:
 The Bank is a partner in Appalachian Fund for Growth II, LLC with three other Tennessee
banking institutions. This partnership involves a new markets tax credit which is
generated from a tax credit allocation from the Community Development Financial Institutions
Fund (CDFI). The purposes of the partnership are (a) to have the primary mission of
providing investment capital, solely in the form of loans, to low-income communities in
accordance with the New Markets Tax Credit Program and (b) to make loans that are qualified
low-income community investment loans. This partnership is accounted for using the equity
method of accounting.
 Premises and equipment:
 Land is carried at cost. Other premises and equipment are carried at cost net of accumulated
depreciation. Depreciation is computed using the straight-line and the declining balance
methods based on the estimated useful lives of the assets. Useful lives range from three to
forty years for premises and improvements, and from three to ten years for furniture and
equipment. Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Gains and losses on dispositions are included in current
operations.
 Other real estate owned:
 Real estate properties acquired through or in lieu of loan foreclosure are initially
recorded at the fair value less estimated selling cost at the date of foreclosure. Any
write-downs based on the assets fair value at the date of acquisition are charged to the
allowance for loan losses. Valuations are periodically performed by management, and any
subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the
carrying
value of a property to fair value less cost to sell. Other real estate owned also includes
excess Bank property not utilized when subdividing land acquired for the construction of
Bank branches. Costs of significant property improvements are capitalized. Costs relating to
holding property are expensed.
  F-10




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##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 Income taxes:
 The Company files consolidated federal and state income tax returns with the Bank and its
subsidiaries. Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred income taxes
related primarily to differences between the basis of the allowance for loan losses and
accumulated depreciation. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or deductible when
the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are
reflected using enacted income tax rates. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for income taxes.
 A tax position is recognized as a benefit only if it is more likely than not that the tax
position would be sustained in a tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the more likely than
not test, no tax benefit is recorded.
 Advertising costs:
 The Company expenses all advertising costs as incurred. Advertising expense was $276,129 and
$332,989 for the years ended December 31, 2009 and 2008, respectively.
 Company owned life insurance:
 The Company has purchased life insurance policies on certain key executives. Company owned
life insurance is recorded at the amount that can be realized under the insurance contract
at the balance sheet date, which is the cash surrender value adjusted for other charges or
other amounts due that are probable at settlement.
 Long-term assets:
 Premises and equipment and other long-term assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted cash flows.
If impaired, the assets are recorded at fair value.
 Loan commitments and related financial instruments:
 Financial instruments include off-balance sheet credit instruments, such as commitments to
make loans and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded when they are
funded.
  F-11




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##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 Retirement plans:
 Employee 401(k) and profit sharing plan expense is the amount of matching contributions made
by the Company pursuant to the Companys 401(k) benefit plan. Deferred compensation and
supplemental retirement plan expense allocates the benefits over years of service.
 Earnings per common share:
 Basic earnings per common share is net income divided by the weighted average number of
common shares outstanding during the period. Diluted earnings per common share includes the
dilutive effect of additional potential common shares issuable under stock options and stock
warrants. Any shares having an antidilutive effect are excluded from the calculation.
Earnings and dividends per share are restated for all stock splits and dividends through the
date of issue of the financial statements.
 Comprehensive income:
 Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities available for sale,
which is also recognized as a separate component of equity.
 Loss contingencies:
 Loss contingencies, including claims and legal actions arising in the ordinary course of
business, are recorded as liabilities when the likelihood of loss is probable and an amount
or range of loss can be reasonably estimated. Management does not believe there are now such
matters that will have a material effect on the financial statements.
 Restrictions on cash:
 Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory
reserve and clearing requirements. Beginning October 1, 2008, the Federal Reserve was
authorized to pay interest on these balances based on a spread to the average target federal
funds rate. These balances did not earn interest prior to that date.
 Equity:
 Stock dividends in excess of 20% of the Companys outstanding shares are reported by
transferring the par value of the stock issued from retained earnings to common stock. Stock
dividends for 20% or less of the Companys outstanding shares are reported by transferring
the fair value, as of the ex-dividend date, of the stock issued from retained
earnings to common stock and additional paid-in capital. Fractional share amounts are paid
in cash with a reduction in retained earnings.
  F-12




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##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 Dividend restriction:
 Banking regulations require maintaining certain capital levels and may limit the dividends
paid by the bank to the holding company or by the holding company to shareholders. Banking
regulations also limit the ability of banks that are incurring losses to pay dividends
without prior regulatory approval. (See Note 15  Regulatory Matters for more specific
disclosure.)
 Stock-based compensation:
 Compensation cost is recognized for stock options and restricted stock awards issued to
employees, based on the fair value of these awards at the date of grant. A Black-Scholes
model is utilized to estimate the fair value of stock options, while the market price of the
Companys common stock at the date of grant is used for restricted stock awards.
Compensation cost is recognized over the required service period, generally defined as the
vesting period. At December 31, 2009, the Company has a stock-based compensation plan, which
is described more fully in Note 14  Stock Options.
 Segment reporting:
 While the chief decision-makers monitor the revenue streams of the various products and
services, operations are managed and financial performance is evaluated on a Company-wide
basis. In the Companys operations, each branch is viewed by management as being a
separately identifiable business or segment from the perspective of monitoring performance
and allocation of financial resources. Although the branches operate independently and are
managed and monitored separately, each is substantially similar in terms of business focus,
type of customers, products and services. Accordingly, the Companys consolidated financial
statements reflect the presentation of segment information on an aggregated basis in one
reportable segment.
  F-13




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##### Table of Contents



Note 2  Securities
 Securities have been classified in the balance sheet according to managements intent as
securities held to maturity or securities available for sale. The amortized cost and
approximate fair value of securities at December 31, 2009 and 2008 are as follows:
 2009Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U. S. Government
securities
    
    $
    3,250,638
    
    
    $
    
    
    
    $
    (87
    )
    
    $
    3,250,551U. S. Government
agencies
    
    
    6,997,816
    
    
    
    89
    
    
    
    (99,536
    )
    
    
    6,898,369Obligations of states and
political subdivisions
    
    
    19,977,724
    
    
    
    257,496
    
    
    
    (111,291
    )
    
    
    20,123,929Mortgage-backed
securities  residential
    
    
    113,645,162
    
    
    
    1,065,493
    
    
    
    (653,436
    )
    
    
    114,057,219$
    143,871,340
    
    
    $
    1,323,078
    
    
    $
    (864,350
    )
    
    $
    144,330,068Securities held to maturity:Obligations of states and
political subdivisions
    
    $
    2,204,303
    
    
    $
    63,980
    
    
    $
    (60,047
    )
    
    $
    2,208,236
  F-14




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##### Table of Contents



Note 2  Securities (continued)
 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  residential
    
    
    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
 The proceeds from sales of securities and the associated gains and losses are listed
below:
 2009
    
    
    2008Proceeds
    
    $
    89,957,394
    
    
    $
    16,149,538Gross gains
    
    
    2,562,423
    
    
    
    179,382Gross losses
    
    
    (3,811
    )
    
    
    (108
    )
 The amortized cost and fair value of securities at December 31, 2009, by contractual
maturity, are shown below. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
  F-15




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##### Table of Contents



Note 2  Securities (continued)
 Securities Available for Sale
    
    
    Securities Held to MaturityAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueWithin one year
    
    $
    6,248,454
    
    
    $
    6,248,450
    
    
    $
    
    
    
    $
    One to five years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Five to ten years
    
    
    5,948,218
    
    
    
    6,026,887
    
    
    
    689,563
    
    
    
    707,730Beyond ten years
    
    
    18,029,506
    
    
    
    17,997,512
    
    
    
    1,514,740
    
    
    
    1,500,506Mortgage-backed
securities 
residential
    
    
    113,645,162
    
    
    
    114,057,219
    
    
    
    
    
    
    
    $
    143,871,340
    
    
    $
    144,330,068
    
    
    $
    2,204,303
    
    
    $
    2,208,236
 At December 31, 2009 and 2008, securities with a carrying value of approximately
$131,039,000 and $106,808,000, respectively, were pledged to secure public deposits and for
other purposes required or permitted by law. At December 31, 2009 and 2008, the carrying
amount of securities pledged to secure repurchase agreements was approximately $2,293,000
and $6,095,000, respectively.
 The Company did not hold any securities from a single issuer that exceeded 10% of total
shareholders equity as of December 31, 2009, other than securities of the U.S. Government
and its agencies and mortgage-backed securities issued by government sponsored entities that
had a carrying value of approximately $114,057,000 and $98,105,000 at December 31, 2009 and
2008, respectively.
  F-16




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##### Table of Contents



Note 2  Securities (continued)
 The following table summarizes the investment securities with unrealized losses at December
31, 2009 and 2008 aggregated by major security type and length of time in a continuous
unrealized loss position:
 December 31, 2009:
 Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossU. S. Government
securities
    
    $
    252,373
    
    
    $
    (87
    )
    
    $
    
    
    
    $
    
    
    
    $
    252,373
    
    
    $
    (87
    )U. S. Government
agencies
    
    
    4,899,769
    
    
    
    (99,536
    )
    
    
    
    
    
    
    
    
    
    
    4,899,769
    
    
    
    (99,536
    )Obligations of states and
political subdivisions
    
    
    4,797,788
    
    
    
    (171,338
    )
    
    
    
    
    
    
    
    
    
    
    4,797,788
    
    
    
    (171,338
    )Mortgage-backed
securities  residential
    
    
    46,712,247
    
    
    
    (653,436
    )
    
    
    
    
    
    
    
    
    
    
    46,712,247
    
    
    
    (653,436
    )Total temporarily impaired
    
    $
    56,662,177
    
    
    $
    (924,397
    )
    
    $
    
    
    
    $
    
    
    
    $
    56,662,177
    
    
    $
    (924,397
    )
 December 31, 2008:
 Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossObligations 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  residential
    
    
    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
    )
 As of December 31, 2009, the Companys security portfolio consisted of 153 securities,
42 of which were in an unrealized loss position. The majority of unrealized losses are
related to the Companys obligations of states and political subdivisions and
mortgage-backed securities, as discussed below.
  F-17




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##### Table of Contents



Note 2  Securities (continued)
 Mortgage-Backed Securities
 At December 31, 2009, 100% of the mortgage-backed securities held by the Company were issued
by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and
Ginnie Mae, institutions which the government has affirmed its commitment to support.
Because the decline in fair value is attributable to changes in interest rates and
illiquidity, and not credit quality, and because the Company does not have the intent to
sell these mortgage-backed securities and it is likely that it will not be
required to sell the securities before their anticipated recovery, the Company does not
consider these securities to be other-than-temporarily impaired at December 31, 2009.
 Obligations of States and Political Subdivisions
 Unrealized losses on obligations of states and political subdivisions have not been
recognized in income because the issuer(s) bonds are of high credit quality, the decline in
fair value is largely due to changes in interest rates and other market conditions, and
because the Company does not have the intent to sell these securities and it is likely that
it will not be required to sell the securities before their anticipated recovery. The
Company does not consider these securities to be other-than-temporarily impaired at December
31, 2009.
 Other-Than-Temporary-Impairment
 Management evaluates securities for OTTI at least on a quarterly basis, and more frequently
when economic or market conditions warrant such an evaluation. In determining OTTI,
management considers many factors, including: (1) the length of time and the extent to which
the fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by macroeconomic
conditions, and (4) whether the entity has the intent to sell the debt security or more
likely than not will be required to sell the debt security before its anticipated
recovery. The assessment of whether an other-than-temporary decline exists involves a high
degree of subjectivity and judgment and is based on the information available to management
at a point in time.
 When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an
entity intends to sell the debt security or it is more likely than not it will be
required
to sell the security before recovery of its amortized cost basis, less any
current-period credit loss. If an entity intends to sell or it is more likely than not it
will be required to sell the security before recovery of its amortized cost basis,
less any current-period credit loss, the OTTI shall be recognized in earnings equal to the
entire difference between the investments amortized cost basis and its fair value at the
balance sheet date. Otherwise, the OTTI shall be separated into the amount representing
the credit loss and the amount related to all other factors. The amount of the total
OTTI related to the credit loss is determined based on the present value of cash
flows expected to be collected and is recognized in earnings. The amount of the total
OTTI related to other factors is recognized in other comprehensive income, net of applicable
taxes. The previous amortized cost basis less the OTTI recognized in earnings
becomes the new amortized cost basis of the investment.
  F-18




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##### Table of Contents



Note 2  Securities (continued)
 Other Securities
 On May 1, 2009, Silverton Bank, the bank subsidiary of Silverton Financial Services, Inc.
(Silverton), was placed into receivership by the Office of the Comptroller of the Currency
after Silverton Banks capital deteriorated significantly in the first quarter of 2009, and
on June 5, 2009 Silverton filed a petition for bankruptcy. The Company does not anticipate
that it will recover any of the Banks investment in either the common securities or trust
preferred securities issued by Silverton or its affiliated trust. As a result, the Company
recorded an impairment charge of $347,368, which represents the Companys full investment in
the securities, during the first quarter of 2009.
 Note 3  Loans and Allowance for Loan Losses
 At December 31, 2009 and 2008, the Banks loans consisted of the following:
 2009
    
    
    2008Mortgage loans on real estate:Residential 1-4 family
    
    $
    88,491,997
    
    
    $
    75,921,024Residential multifamily
    
    
    7,259,301
    
    
    
    6,587,643Commercial
    
    
    138,374,082
    
    
    
    113,734,280Construction
    
    
    99,771,212
    
    
    
    142,369,956Second mortgages
    
    
    7,127,228
    
    
    
    6,058,854Equity lines of credit
    
    
    29,370,304
    
    
    
    29,697,498370,394,124
    
    
    
    374,369,255Commercial loans
    
    
    30,386,527
    
    
    
    37,631,830Consumer installment loans:Personal
    
    
    4,512,571
    
    
    
    6,233,261Credit cards
    
    
    2,411,224
    
    
    
    2,194,9126,923,795
    
    
    
    8,428,173Total loans
    
    
    407,704,446
    
    
    
    420,429,258Less: Allowance for loan losses
    
    
    (11,353,438
    )
    
    
    (5,292,028
    )Loans, net
    
    $
    396,351,008
    
    
    $
    415,137,230
  F-19




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##### Table of Contents



Note 3  Loans and Allowance for Loan Losses (continued)
 A summary of transactions in the allowance for loan losses for the years ended December 31,
2009 and 2008 is as follows:
 2009
    
    
    2008Balance, beginning of year
    
    $
    5,292,028
    
    
    $
    3,974,354Provision for loan losses
    
    
    11,672,802
    
    
    
    2,275,000Loans charged-off
    
    
    (5,890,874
    )
    
    
    (1,023,366
    )Recoveries of loans previously charged-off
    
    
    279,482
    
    
    
    66,040Balance, end of year
    
    $
    11,353,438
    
    
    $
    5,292,028
 The Bank had a concentration of credit at December 31, 2009 in real estate loans, which
totaled approximately $370,394,000. Real estate loans accounted for 91% of total loans and
were primarily commercial loans secured by commercial properties and residential mortgage
loans. Additionally, a large portion of the Banks real estate loans were for construction,
land acquisition and development. Substantially all real estate loans are secured by
properties located in Tennessee.
 Loans to executive officers, principal shareholders and directors and their affiliates were
approximately $17,933,000 and $18,613,000 at December 31, 2009 and 2008, respectively. For
the year ended December 31, 2009, the activity in these loans included new borrowings of
approximately $1,018,000 and repayments of approximately
$1,698,000. None of these loans to executive officers, principal shareholders and directors
and their affiliates, were impaired at December 31, 2009 or 2008.
 Individually impaired loans were as follows:
 2009
    
    
    2008Year-end loans with allocated allowance
for loan losses
    
    $
    37,952,662
    
    
    $
    2,807,562Year-end loans with no allocated allowance
for loan losses
    
    
    25,194,329
    
    
    
    539,263Total impaired loans
    
    
    63,146,991
    
    
    
    3,346,825Allowance for loan losses on impaired loans
    
    
    5,367,678
    
    
    
    561,250Average of individually impaired loans
during the year
    
    
    54,479,634
    
    
    
    4,600,602Amount of partial charge-offs related to
impaired loans above
    
    
    2,218,029
    
    
    
    
  F-20




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##### Table of Contents



Note 3  Loans and Allowance for Loan Losses (continued)
 Impaired loans also include loans that the Bank may elect to formally restructure due to the
weakening credit status of a borrower such that the restructuring may facilitate a repayment
plan that minimizes the potential losses, if any, that the Bank may have to otherwise incur.
These loans are classified as impaired loans and, if on nonaccruing status as of the date of
restructuring, the loans are included in the nonperforming loan balances noted below. Not
included in nonperforming loans are loans that have been restructured that were performing
as of the restructure date. The Company has allocated $3,733,765 of specific reserves to
customers whose loan terms have been modified in troubled debt restructurings as of December
31, 2009. The Company has $37,332,034 outstanding to customers whose loans are classified as
a troubled debt restructuring. The Company has committed to lend additional amounts totaling
$900,367 related to loans classified as troubled debt restructurings. At December 31, 2009,
there were $21,797,811 of accruing restructured loans that remain in a performing status.
There were no accruing restructured loans at December 31, 2008.
 At December 31, 2009 and 2008, the Bank had certain impaired loans on nonaccruing interest
status. The principal balance of these nonaccrual loans amounted to approximately
$39,587,000 and $1,964,000 at December 31, 2009 and 2008, respectively. In most cases, at
the date such loans were placed on nonaccrual status, the Bank reversed all previously
accrued interest income against the current year earnings.
Had nonaccruing loans been on accruing status, interest income would have been higher by
approximately $1,358,000 and $97,000 for the years ended December 31, 2009 and 2008,
respectively.
 Nonperforming loans were as follows:
 2009
    
    
    2008Loans past due over 90 days still on accrual
    
    $
    67,634
    
    
    $
    128,620Nonaccrual loans
    
    
    40,548,546
    
    
    
    11,711,449
 Nonperforming loans include both smaller balance homogeneous loans that are collectively
evaluated for impairment and individually classified as impaired loans.
  F-21




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##### Table of Contents



Note 4  Bank Premises and Equipment
 A summary of Bank premises and equipment at December 31, 2009 and 2008, is as follows:
 2009
    
    
    2008Land
    
    $
    9,694,709
    
    
    $
    9,047,710Buildings and improvements
    
    
    22,753,470
    
    
    
    21,154,187Furniture, fixtures and equipment
    
    
    8,934,486
    
    
    
    7,585,05041,382,665
    
    
    
    37,786,947Accumulated depreciation
    
    
    (7,673,383
    )
    
    
    (6,302,714
    )$
    33,709,282
    
    
    $
    31,484,233
 Depreciation expense for the years ended December 31, 2009 and 2008 amounted to $1,430,157
and $1,248,204, respectively.
 At December 31, 2008, construction in process totaled $5,328,854 and is included in the
buildings and improvements line item above. The balance consisted primarily of costs
associated with the construction of our Blount County Regional Headquarters and Operations
Center expansion in Sevier County.
 Note 5  Deposits
 The aggregate amount of time deposits in denominations of $100,000 or more at December 31,
2009 and 2008, was approximately $168,252,000 and $172,302,000, respectively, including
brokered deposits of approximately $69,955,000 and $57,151,000, respectively, for each time
period.
 At December 31, 2009, the scheduled maturities of time deposits for each of the five years
subsequent to December 31, 2009 were as follows:
 2010
    
    $
    239,610,3352011
    
    
    39,191,3172012
    
    
    9,029,5862013
    
    
    745,4072014
    
    
    667,249Total
    
    $
    289,243,894
 Deposits of employees, officers and directors totaled approximately $8,482,000 at December
31, 2009 and $7,923,000 at December 31, 2008.
  F-22




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##### Table of Contents



Note 6  Income Taxes (Benefits)
 Income tax expense (benefit) in the statements of income for the years ended December 31,
2009 and 2008 consists of the following:
 2009
    
    
    2008Current tax expense
    
    $
    89,951
    
    
    $
    1,438,411Deferred tax expense (benefit)
    
    
    (3,877,978
    )
    
    
    (611,624
    )Income tax expense (benefit)
    
    $
    (3,788,027
    )
    
    $
    826,787
 Income tax expense differs from amounts computed by applying the Federal income tax
statutory rate of 34% in 2009 and 2008 to income before income taxes. A reconciliation of
the differences for the years ended December 31, 2009 and 2008 is as follows:
 2009
    
    
    2008Expected tax at statutory rates
    
    $
    (2,726,000
    )
    
    $
    1,396,000Increase (decrease) resulting from tax effect of:State income taxes, net of federal tax
    
    
    (544,004
    )
    
    
    (90,328
    )Increase in cash surrender value of life insurance
    
    
    (94,601
    )
    
    
    (145,831
    )Tax exempt interest
    
    
    (347,420
    )
    
    
    (258,597
    )General business credits, net of basis reduction
    
    
    (132,000
    )
    
    
    (132,000
    )Other
    
    
    55,998
    
    
    
    57,543Income tax expense (benefit)
    
    $
    (3,788,027
    )
    
    $
    826,787
  F-23




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##### Table of Contents



Note 6  Income Taxes (Benefits) (continued)
 Significant components of the Companys deferred tax assets and liabilities at December 31,
2009 and 2008 were as follows:
 2009
    
    
    2008Deferred tax assets:Allowance for loan losses
    
    $
    4,214,292
    
    
    $
    1,779,980Deferred compensation
    
    
    419,399
    
    
    
    303,785Unrealized loss on securities available for sale
    
    
    
    
    
    
    101,750Net operating loss
    
    
    371,065
    
    
    
    199,477Nonaccrual loans
    
    
    472,359
    
    
    
    87,223Tax credits
    
    
    150,816
    
    
    
    Other real estate owned
    
    
    488,685
    
    
    
    Other
    
    
    315,770
    
    
    
    177,794Total deferred tax assets
    
    
    6,432,386
    
    
    
    2,650,009Deferred tax liabilities:Accelerated depreciation
    
    
    (604,553
    )
    
    
    (619,000
    )Unrealized gain on securities available for sale
    
    
    (175,714
    )
    
    
    Income from subsidiary
    
    
    (49,823
    )
    
    
    (46,973
    )Investment in partnership
    
    
    (72,000
    )
    
    
    (204,000
    )Other
    
    
    (358,491
    )
    
    
    (208,745
    )Total deferred tax liabilities
    
    
    (1,260,581
    )
    
    
    (1,078,718
    )Total net deferred tax assets
    
    $
    5,171,805
    
    
    $
    1,571,291
  F-24




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##### Table of Contents



Note 6  Income Taxes (Benefits) (continued)
 We had net deferred tax assets of approximately $5 million as of December 31, 2009. We
did not establish a valuation allowance against our net deferred tax assets as of
December 31, 2009 because we believe that it is more likely than not that all of these
assets will be realized. In evaluating the need for a valuation allowance, we considered the
reversal of deferred tax liabilities, the ability to carryback losses to prior years, tax
planning strategies and estimated future taxable income based on management prepared
forecasts. This process required significant judgment by management about matters that are
by nature uncertain. If future events differ significantly from our current forecasts, we
may need to establish a valuation allowance, which could have a material adverse effect on
our results of operations and financial condition.
 The Bank has a Tennessee net operating loss carryforward, approximately $1,590,000 of which
will expire in 2021, $1,630,000 of which will expire in 2022, $1,681,000 of which will
expire in 2023 and $3,748,000 of which will expire in 2024 if not offset by future taxable
income.
 The Bank has a minimum tax credit of $151,000 that can be carried forward indefinitely.
 The Company currently has no unrecognized tax benefits that, if recognized, would favorably
affect the effective income tax rate in future periods. The Company does not expect any
unrecognized tax benefits to significantly increase or decrease in the next twelve months.
It is the Companys policy to recognize any interest accrued related to unrecognized tax
benefits in interest expense, with any penalties recognized as operating expenses.
 The Company and its subsidiaries are subject to U.S. federal income tax as well as income
tax of the state of Tennessee. The Company is no longer subject to examination by taxing
authorities for tax years before 2006.
  F-25




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##### Table of Contents



Note 7  Federal Home Loan Bank Advances
 The Bank has an agreement with the Federal Home Loan Bank of Cincinnati (FHLB) that
provides short-term and long-term funding to the Bank in an amount up to $100,000,000. The
Banks portfolio of one to four single-family mortgages, commercial real estate, home equity
lines of credit and multi-family mortgages have been pledged as collateral for any advances
under a blanket lien arrangement requiring a collateral-to-loan ratio of 180%, 400%, 400%
and 250%, respectively. At year end, advances from the FHLB were as follows:
 2009
    
    
    2008Short-term advance requiring monthly interest payments
at 0.54% variable, principal due in February 2009
    
    $
    
    
    
    $
    10,000,000Long-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 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
    
    
    
    10,000,000Long-term callable advance requiring monthly interest payments
at 4.27% fixed, principal due in May 2017
    
    
    10,000,000
    
    
    
    10,000,000Long-term callable advance requiring monthly interest payments
at 4.68% fixed, principal due in June 2017
    
    
    10,000,000
    
    
    
    10,000,000Long-term callable advance requiring monthly interest payments
at 3.36% fixed, principal due in December 2012
    
    
    5,000,000
    
    
    
    5,000,000Long-term callable advance requiring monthly interest payments
at 3.46% fixed, principal due in December 2014
    
    
    5,000,000
    
    
    
    5,000,000Long-term callable advance requiring monthly interest payments
at 3.13% fixed, principal due in January 2015
    
    
    5,000,000
    
    
    
    5,000,000$
    62,900,000
    
    
    $
    72,900,000
 Each advance is payable at its maturity date, with prepayment penalties that vary
according to the type of advance. Maturities of the notes payable for each of the years
subsequent to December 31, 2009 are as follows:
 2010
    
    $
    200,0002011
    
    
    7,500,0002012
    
    
    5,200,0002014
    
    
    5,000,0002015
    
    
    5,000,0002017
    
    
    40,000,000Total
    
    $
    62,900,000
  F-26




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##### Table of Contents



Note 8  Subordinated Debentures
 On November 7, 2003, we established MNB Capital Trust I and on June 9, 2006, we
established MNB Capital Trust II (Trust I and Trust II or collectively, the Trusts).
Both are wholly-owned statutory business trusts. The Company is the sole sponsor of the
Trusts and acquired each Trusts common securities for $171,000 and $232,000, respectively.
The Trusts were created for the exclusive purpose of issuing 30-year capital trust preferred
securities (Trust Preferred Securities) in the aggregate amount of $5,500,000 for Trust I
and $7,500,000 for Trust II and using the proceeds to acquire junior subordinated debentures
(Subordinated Debentures) issued by the Company. The sole assets of the Trusts are the
Subordinated Debentures. The Companys aggregate $403,000 investment in the Trusts is
included in other assets in the accompanying consolidated balance sheets and the $13,403,000
obligation of the Company is reflected as subordinated debt.
 The Trust I Preferred Securities bear a floating interest rate based on a spread over
3-month LIBOR and was 3.337% at December 31, 2009 which is set each quarter and mature on
December 31, 2033. The Trust II Preferred Securities bear a floating interest rate based on
a spread over 3-month LIBOR and was 1.884% at December 31, 2009 which is set each quarter
and mature on July 7, 2036. Distributions are payable quarterly. The Trust Preferred
Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures
at their stated maturity date or their earlier redemption in an amount equal to their
liquidation amount plus accumulated and unpaid distributions to the date of redemption. The
Company guarantees the payment of distributions and payments for redemption or liquidation
of the Trust Preferred Securities to the extent of funds held by the Trusts. The Companys
obligations under the Subordinated Debentures together with the guarantee and other back-up
obligations, in the aggregate, constitute a full and unconditional guarantee by the Company
of the obligations of the Trusts under the Trust Preferred Securities.
 The Subordinated Debentures are unsecured, bear interest at a rate equal to the rates paid
by the Trusts on the Trust Preferred Securities and mature on the same dates as those noted
above for the Trust Preferred Securities. Interest is payable quarterly. The Company may
defer the payment of interest at any time for a period not exceeding 20 consecutive quarters
provided that deferral period does not extend past the stated maturity. During any such
deferral period, distributions on
the Trust Preferred Securities will also be deferred and the Companys ability to pay
dividends on its common shares will be restricted.
 Subject to approval by the Federal Reserve Bank of Atlanta, if then required, the Trust
Preferred Securities may be redeemed prior to maturity at the Companys option on or after
December 31, 2008, for Trust I and on or after July 7, 2011, for Trust II. The Trust
Preferred Securities may also be redeemed at any time in whole (but not in part) in the
event of unfavorable changes in laws or regulations that result in (1) the Trusts becoming
subject to federal income tax on income received on the Subordinated Debentures, (2)
interest payable by the Company on the Subordinated Debentures becoming non-deductible for
federal tax purposes, (3) the requirement for the Trusts to register under the Investment
Company Act of 1940, as amended, or (4) loss of the ability to treat the Trust Preferred
Securities as Tier 1 capital under the Federal Reserve capital adequacy guidelines.
  F-27




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Note 8  Subordinated Debentures (continued)
 The Companys investments in Trust I and Trust II are included in other assets. These
investments are accounted for under the equity method and consist of 100% of the common
stock of Trust I and Trust II.
 Note 9  Securities Sold Under Agreements to Repurchase
 Securities sold under agreements to repurchase are variable rate financing arrangements with
no fixed maturity. Upon cancellation of the agreement, the securities underlying the
agreements are returned to the Company. Information concerning securities sold under
agreements to repurchase is summarized as follows:
 2009
    
    
    2008Weighted average borrowing rate at year-end
    
    
    1.52
    %
    
    
    2.20
    %Weighted average borrowing rate during the year
    
    
    2.12
    %
    
    
    2.53
    %Average daily balance during the year
    
    $
    4,283,833
    
    
    $
    5,093,472Maximum month-end balance during the year
    
    
    7,872,502
    
    
    
    7,413,995Balance at year-end
    
    
    1,776,402
    
    
    
    4,331,865
 Note 10  Employee Benefit Plans
 The Bank sponsors a 401(k) employee benefit plan covering substantially all employees who
have completed at least six months of service and met minimum age requirements. The Banks
contribution to the plan is discretionary and was $111,373 for 2009 and $120,422 for 2008.
 The Company also has salary continuation agreements in place with certain key officers. Such
agreements are structured with differing benefits based on the participants overall position
and responsibility. These agreements provide the participants with a supplemental income
upon retirement at age 65, additional incentive to remain with the Company in order to
receive these deferred retirement benefits and a compensation package that is competitive in
the market. These agreements vest over a ten year period, require a minimum number of years
of service and contain change of control provisions. All benefits would cease in the event
of termination for cause, and if the participants employment were to end due to disability,
voluntary termination or termination without cause, the participant would be entitled to
receive certain reduced benefits based on vesting and other conditions.
 The estimated cost of this obligation is being accrued over the service period for each
officer. The Company recognized expense of $301,943 and $262,594 during 2009 and 2008,
respectively, related to these agreements. The total amount accrued at December 31, 2009 and
2008 was $1,095,323 and $793,380, respectively.
  F-28




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Note 11  Leases
 The Bank is leasing the land on which its Gatlinburg branch is located under a
non-cancelable lease agreement that expires in 2013. This lease agreement contains renewal
options for twelve additional five-year terms.
 The Bank is also leasing the land on which its Justice Center branch is located under a
non-cancelable lease agreement that expires in 2013. This lease agreement contains renewal
options for six additional five-year terms. The Bank completed construction of its Justice
Center branch on this property during the second quarter of 2008.
 In addition, the Bank is leasing the building in which its Gatlinburg walk-up facility is
located and the property on which it has placed certain automated teller machines. These
leases expire at various dates through 2010 and contain various renewal options. Total
rental expense under all operating leases was $182,330 in 2009 and $184, 204 in 2008.
 The following is a schedule by years of future minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease terms in excess of one
year as of December 31, 2009:
 2010
    
    $
    148,5492011
    
    
    101,7452012
    
    
    103,3692013
    
    
    78,2702014
    
    
    Thereafter
    
    
    Total
    
    $
    431,933
  F-29




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Note 12  Financial Instruments with Off-Balance Sheet Risk
 In the normal course of business, the Bank has outstanding commitments and contingent
liabilities, such as commitments to extend credit and standby letters of credit, which are
not included in the accompanying financial statements. The Banks exposure to credit loss in
the event of nonperformance by the other party to the financial instruments for commitments
to extend credit and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Bank uses the same credit policies in making such
commitments as it does for instruments that are included in the balance sheet. At December
31, 2009, commitments under standby letters of credit and undisbursed loan commitments,
substantially all of which are carried at variable rates, were as follows:
 2009
    
    
    2008(dollars in thousands)Commitments to extend credit
    
    $
    50,702
    
    
    $
    82,097Standby letters of credit
    
    
    5,801
    
    
    
    9,885Totals
    
    $
    56,503
    
    
    $
    91,982
    Note 13  Fair Value
    F-30




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Note 13  Fair Value (continued)
    Investment Securities Available for Sale
 Impaired Loans
 Other Real Estate
  F-31




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Note 13  Fair Value (continued)
 Assets and Liabilities Measured on a Recurring Basis
  Fair Value Measurements atDecember 31, 2009 Using:Significant OtherObservable InputsCarrying Value
    
    
    (Level 2)Assets:Available for sale securities:U. S. Government securities
    
    $
    3,250,551
    
    
    $
    3,250,551U. S. Government sponsored
entities and agencies
    
    
    6,898,369
    
    
    
    6,898,369Obligations of states and
political subdivisions
    
    
    20,123,929
    
    
    
    20,123,929Mortgage-backed securities-residential
    
    
    114,057,219
    
    
    
    114,057,219Total available for sale securities
    
    $
    144,330,068
    
    
    $
    144,330,068
 Fair Value Measurements atDecember 31, 2008 Using:Significant OtherObservable InputsCarrying Value
    
    
    (Level 2)Assets:Available for sale securities:U. S. Government securities
    
    $
    256,798
    
    
    $
    256,798U. S. Government sponsored
entities and agencies
    
    
    5,495,315
    
    
    
    5,495,315Obligations of states and
political subdivisions
    
    
    20,606,736
    
    
    
    20,606,736Corporate securities
    
    
    114,853
    
    
    
    114,853Mortgage-backed securities-residential
    
    
    98,104,657
    
    
    
    98,104,657Total available for sale securities
    
    $
    124,578,359
    
    
    $
    124,578,359
  F-32




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##### Table of Contents



Note 13  Fair Value (continued)
 Assets and Liabilities Measured on a Non-Recurring Basis
  Fair Value Measurements atDecember 31, 2009 Using:SignificantUnobservable InputsCarrying Value
    
    
    (Level 3)Assets:Impaired Loans
    
    $
    39,848,461
    
    
    $
    39,848,461Other real estate
    
    
    12,019,079
    
    
    
    12,019,079Total Assets Measured at FairValue on a Non-Recurring Basis
    
    $
    51,867,540
    
    
    $
    51,867,540
 Fair Value Measurements atDecember 31, 2008 Using:SignificantUnobservable InputsCarrying Value
    
    
    (Level 3)Assets:Impaired Loans
    
    $
    2,246,312
    
    
    $
    2,246,312
    F-33




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Note 13  Fair Value (continued)
 Fair Value of Financial Instruments
              F-34




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Note 13  Fair Value (continued)
            F-35




---



##### Table of Contents



Note 13  Fair Value (continued)
  December 31, 2009
    
    
    December 31, 2008Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    14,105
    
    
    $
    14,105
    
    
    $
    14,590
    
    
    $
    14,590Investment securities held to maturity
    
    
    2,204
    
    
    
    2,208
    
    
    
    2,117
    
    
    
    1,813Restricted investments
    
    
    3,816
    
    
    
    N/A
    
    
    
    3,863
    
    
    
    N/ALoans, net
    
    
    396,351
    
    
    
    396,254
    
    
    
    415,137
    
    
    
    417,969Accrued interest receivable
    
    
    3,045
    
    
    
    3,045
    
    
    
    2,738
    
    
    
    2,738Liabilities:Noninterest-bearing demand deposits
    
    $
    47,601
    
    
    $
    47,601
    
    
    $
    44,652
    
    
    $
    44,652NOW accounts
    
    
    112,440
    
    
    
    112,440
    
    
    
    110,420
    
    
    
    110,420Savings and money market accounts
    
    
    61,329
    
    
    
    61,329
    
    
    
    53,144
    
    
    
    53,144Time deposits
    
    
    289,244
    
    
    
    290,534
    
    
    
    246,449
    
    
    
    248,356Subordinated debentures
    
    
    13,403
    
    
    
    6,922
    
    
    
    13,403
    
    
    
    10,582Federal funds purchased and securities
sold under agreements to repurchase
    
    
    1,776
    
    
    
    1,776
    
    
    
    26,912
    
    
    
    26,912Federal Reserve/Federal Home Loan
Bank advances
    
    
    62,900
    
    
    
    67,989
    
    
    
    72,900
    
    
    
    80,517Accrued interest payable
    
    
    606
    
    
    
    606
    
    
    
    1,023
    
    
    
    1,023
  F-36




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##### Table of Contents



Note 14  Stock Options
  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
    
    
    125,086
    
    
    $
    21.44
    
    
    
    378,311Equity compensation plans not
approved by security holders
    
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    Weighted AverageNumber
    
    
    Average
    
    
    Remaining
    
    
    Aggregateof Options
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOptions outstanding, December 31, 2008
    
    
    121,717
    
    
    $
    21.64Options granted
    
    
    9,000
    
    
    
    13.75Options exercised
    
    
    
    
    
    
    Options forfeited
    
    
    (5,631
    )
    
    
    13.41Options outstanding, December 31, 2009
    
    
    125,086
    
    
    $
    21.44
    
    
    
    6.38
    
    
    $
    Fully vested and expected to vest
    
    
    125,086
    
    
    $
    21.44
    
    
    
    6.38
    
    
    $
    Exercisable at December 31, 2009
    
    
    58,037
    
    
    $
    18.31
    
    
    
    5.18
    
    
    $
    
  F-37




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##### Table of Contents



Note 14  Stock Options (continued)
  2009
    
    
    2008Intrinsic value of options exercised
    
    $
    
    
    
    $
    764,852Cash received from option exercises
    
    
    
    
    
    
    577,630Tax benefit realized from option exercises
    
    
    70,696
    
    
    
    202,893Weighted average fair value of options granted
    
    
    5.82
    
    
    
    6.60
   2009
    
    
    2008Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected life
    
    9.5 years
    
    
    9.5 yearsExpected volatility
    
    
    18
    %
    
    
    18
    %Risk-free interest rate
    
    
    2.96
    %
    
    
    3.60
    %
 Note 15  Regulatory Matters
   F-38




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##### Table of Contents



Note 15  Regulatory Matters (continued)
    Minimum Capital
    
    
    Minimum to beActual
    
    
    Requirement
    
    
    Well-CapitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of December 31, 2009:Total capital to risk-weighted assets:Consolidated
    
    $
    65,993
    
    
    
    14.16
    %
    
    $
    37,290
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    65,287
    
    
    
    14.02
    %
    
    
    37,260
    
    
    
    8.00
    %
    
    
    46,574
    
    
    
    10.00
    %Tier I capital to risk-weighted assets:Consolidated
    
    
    60,098
    
    
    
    12.89
    %
    
    
    18,645
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    59,397
    
    
    
    12.75
    %
    
    
    18,630
    
    
    
    4.00
    %
    
    
    27,945
    
    
    
    6.00
    %Tier I capital to average assets:Consolidated
    
    
    60,098
    
    
    
    9.23
    %
    
    
    26,049
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AMountain National Bank
    
    
    59,397
    
    
    
    9.14
    %
    
    
    26,007
    
    
    
    4.00
    %
    
    
    32,509
    
    
    
    5.00
    %As 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
    %
  F-39




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Note 15  Regulatory Matters (continued)
       F-40




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##### Table of Contents



Note 16  Other Comprehensive Income
  TaxBefore-Tax
    
    
    (Expense)
    
    
    Net-of-TaxAmount
    
    
    Benefit
    
    
    AmountYear ended December 31, 2009:Unrealized holding gains/(losses)
arising during the period
    
    $
    2,919,308
    
    
    $
    (1,117,736
    )
    
    $
    1,801,572Less reclassification adjustment for
gains realized in net income
    
    
    (2,211,243
    )
    
    
    840,272
    
    
    
    (1,370,971
    )$
    708,065
    
    
    $
    (277,464
    )
    
    $
    430,601Year 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
    )
    
    $
    131,403
 Note 17  Earnings Per Common Share
    F-41




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##### Table of Contents



Note 17  Earnings Per Common Share (continued)
  2009
    
    
    2008Net income (loss)
    
    $
    (4,228,395
    )
    
    $
    3,280,208Average number of common shares outstanding
    
    
    2,631,611
    
    
    
    2,634,750Dilutive effect of stock options
    
    
    
    
    
    
    7,195Average number of common shares outstanding used
to calculate diluted earnings per common share
    
    
    2,631,611
    
    
    
    2,641,945
   Note 18  Recent Accounting Pronouncements
 The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162
  F-42




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##### Table of Contents



Note 18  Recent Accounting Pronouncements (continued)
 ASC Topic 820 Fair Value Measurements and Disclosures
   ASC Topic 320 InvestmentsDebt and Equity
  F-43




---



##### Table of Contents



Note 18  Recent Accounting Pronouncements (continued)
 ASC Topic 860 Transfers and Servicing
  Note 19  Dividends
   F-44




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##### Table of Contents



Note 19  Dividends (continued)
  Note 20  Condensed Parent Information
 BALANCE SHEETS
 December 31,2009
    
    
    2008ASSETSCash
    
    $
    114,454
    
    
    $
    463,884Investment in subsidiary
    
    
    59,679,774
    
    
    
    63,285,236Other assets
    
    
    1,015,161
    
    
    
    774,465Total assets
    
    $
    60,809,389
    
    
    $
    64,523,585LIABILITIES AND SHAREHOLDERS EQUITYSubordinated debentures
    
    $
    13,403,000
    
    
    $
    13,403,000Accrued interest payable
    
    
    37,234
    
    
    
    126,832Total liabilities
    
    
    13,440,234
    
    
    
    13,529,832Shareholders equity
    
    
    47,369,155
    
    
    
    50,993,753Total liabilities and shareholders equity
    
    $
    60,809,389
    
    
    $
    64,523,585
 STATEMENTS OF INCOME (LOSS)
 Year Ended December 31,2009
    
    
    2008Dividends from subsidiaries
    
    $
    
    
    
    $
    500,000Interest expense
    
    
    392,016
    
    
    
    763,196Other expense
    
    
    44,114
    
    
    
    145,184Loss before equity in undistributed earnings (loss) of subsidiary
    
    
    (436,130
    )
    
    
    (408,380
    )Equity in undistributed earnings (loss) of subsidiary
    
    
    (3,959,259
    )
    
    
    3,340,769Income tax benefit
    
    
    166,994
    
    
    
    347,819Net income (loss)
    
    $
    (4,228,395
    )
    
    $
    3,280,208
  F-45




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##### Table of Contents



Note 20  Condensed Parent Information (continued)
 STATEMENTS OF CASH FLOWS
 Year Ended December 31,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    (4,228,395
    )
    
    $
    3,280,208Adjustments to reconcile net income to net cash
provided by operating activitiesEquity in undistributed (income) loss of subsidiary
    
    
    3,959,259
    
    
    
    (3,340,769
    )Other
    
    
    (80,294
    )
    
    
    (4,211
    )Net cash used in operating activities
    
    
    (349,430
    )
    
    
    (64,772
    )CASH FLOWS FROM FINANCING ACTIVITIESDividends
    
    
    
    
    
    
    (1,030,812
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    577,630Purchase of common stock
    
    
    
    
    
    
    (1,202,022
    )Net cash used in financing activities
    
    
    
    
    
    
    (1,655,204
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (349,430
    )
    
    
    (1,719,976
    )CASH AND CASH EQUIVALENTS, beginning of year
    
    
    463,884
    
    
    
    2,183,860CASH AND CASH EQUIVALENTS, end of year
    
    $
    114,454
    
    
    $
    463,884SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid (received) during the year for:Interest
    
    $
    481,613
    
    
    $
    768,630Income taxes
    
    
    (154,676
    )
    
    
    (295,042
    )
  F-46