10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

or

o TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 0-49912

MOUNTAIN NATIONAL BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Tennessee	75-3036312
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

300 East Main, Sevierville, Tennessee
(Address of principal executive offices) 37862
(Zip code)

(865) 428-7990
(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $1.00 par value

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o     No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o     No þ

     Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
	(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o     No þ

     State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $60,948,149.

     There were 2,503,224 shares of Common Stock outstanding as of February 29, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s definitive Proxy Statement for the 2008 Annual Meeting of Shareholders (the “2008 Proxy Statement”) are incorporated by reference into Part III of this Report. Other than those portions of the 2008 Proxy Statement specifically incorporated by reference herein pursuant to Part III, no other portions of the 2008 Proxy Statement shall be deemed so incorporated.

MOUNTAIN NATIONAL BANCSHARES, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2007

Table of Contents

Item		Page
Number		Number
	Part I
1.	Business	1
1A.	Risk Factors	19
2.	Properties	23
3.	Legal Proceedings	24
4.	Submission of Matters to a Vote of Security Holders	24
	Part II
5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
7.	Management's Discussion and Analysis of Financial Condition and Results of Operation	26
8.	Financial Statements and Supplementary Data	54
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	54
9A(T).	Controls and Procedures	54
9B.	Other Information	55
	Part III
10.	Directors, Executive Officers and Corporate Governance	55
11.	Executive Compensation	55

Item		Page
Number		Number
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	55
13.	Certain Relationships and Related Transactions, and Director Independence	56
14.	Principal Accountant Fees and Services	56
	Part IV
15.	Exhibits and Financial Statement Schedules	56
	Signatures	59
EX-10.3 SUMMARY OF COMPENSATION AGREEMENTS
EX-10.8 AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT
EX-10.9 AMENDMENT, DATED NOVEMBER 19, 2007, TO AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT
EX-10.10 AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT, DATED JANUARY 19, 2007
EX-10.11 AMENDMENT, DATED NOVEMBER 19,2007, TO AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT
EX-10.12 AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT, DATED JANUARY 19, 2007
EX-10.13 AMENDMENT, DATED NOVEMBER 19,2007, TO AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT
EX-21 SUBSIDIARIES OF THE REGISTRANT
Ex-23 Consent of Independent Registered Public Accounting Firm
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

PART I

ITEM 1. BUSINESS

Forward-Looking Statements

     Certain of the statements made herein under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning and subject to the protections of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

     Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance or achievements of Mountain National Bancshares, Inc. (“Mountain National” or the “Company”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

     All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “seek,” “attempt,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation, those set forth in Item 1A. Risk Factors below and the following factors:

• the effects of future economic or business conditions;

• governmental monetary and fiscal policies, as well as legislative and regulatory changes, including changes in banking, securities and tax laws and regulations;

• the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities and interest sensitive assets and liabilities;

• credit risks of borrowers;

• the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

• the failure of assumptions underlying the establishment of reserves for possible loan losses and other estimates;

• the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and the possible failure to achieve expected gains, revenue growth and/or expense savings from such transactions;

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• changes in accounting policies, rules and practices;

• changes in technology or products that may be more difficult, or costly, or less effective, than anticipated;

• the effects of war or other conflict, acts of terrorism or other catastrophic events that may affect general economic conditions; and

• other factors and risks described in any of our subsequent reports that we make with the Securities and Exchange Commission (the “Commission”) under the Exchange Act.

All written or oral forward-looking statements that are made by or are attributable to us are expressly qualified in their entirety by this cautionary notice. Except as required by the federal securities laws we do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.

The Company

     Mountain National is a bank holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended. The Company provides a full range of banking services through its banking subsidiary, Mountain National Bank (the “Bank”).

     For the purposes of the discussions in this report, the words “we,” “us,” and “our” refer to the combined entities of the Company and the Bank unless otherwise indicated or evident. The Company’s main office is located at 300 East Main Street, Sevierville, Tennessee 37862. The Company was incorporated as a business corporation in March 2003 under the laws of the State of Tennessee for the purpose of acquiring 100% of the issued and outstanding shares of common stock of the Bank. Effective July 1, 2002, the Company and the Bank entered into a reorganization pursuant to which the Company acquired 100% of the outstanding shares of the Bank and the shareholders of the Bank became the shareholders of the Company. In June 2003, the Company received approval from the Federal Reserve Bank of Atlanta to become a bank holding company.

     At December 31, 2007, the assets of the Company consisted primarily of its ownership of the capital stock of the Bank.

     The Company is authorized to engage in any activity permitted by law to a corporation, subject to applicable federal and state regulatory restrictions on the activities of bank holding companies. The Company’s holding company structure provides it with greater flexibility than the Bank would otherwise have relative to expanding and diversifying its business activities through newly formed subsidiaries or through acquisitions. While management of the Company has no present plans to engage in any other business activities, management may from time to time study the feasibility of establishing or acquiring subsidiaries to engage in other business activities to the extent permitted by law.

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The Bank

     The Bank is organized as a national banking association. The Bank applied to the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation, (the “FDIC”), on February 16, 1998, to become an insured national banking association. The Bank received approval from the OCC to organize as a national banking association on June 16, 1998 and commenced business on November 23, 1998. The Bank’s principal business is to accept demand and savings deposits from the general public and to make residential mortgage, commercial and consumer loans.

Our Banking Business

     General. Our banking business consists primarily of traditional commercial banking operations, including taking deposits and originating loans. We conduct our banking activities from our main office located in Sevierville, Tennessee and through six additional branch offices in Sevier County, Tennessee, and one branch office in Blount County, Tennessee. We operate two branch offices in Gatlinburg, two branch offices in Pigeon Forge, a branch office in Seymour, a branch office in Kodak, all in Sevier County, and a branch office that we opened during October 2007 in Maryville, Blount County, Tennessee. The retail nature of our commercial banking operations allows for diversification in the number of our depositors and borrowers, and we do not believe that we are dependent on a single or a few customers.

     We offer a variety of retail banking services. We seek savings and other time and demand deposits from consumers and businesses in our primary market area by offering a full range of deposit accounts, including savings, demand deposit, retirement, including individual retirement accounts, or “IRA’s,” and professional and checking accounts, as well as certificates of deposit. We use the deposit funds we receive to originate mortgage, commercial and consumer loans, and to make other authorized investments. In addition, we currently maintain 17 full-service ATMs throughout our market area. Because the Bank is a member of a number of payment systems networks, Bank customers may also access banking services through ATMs and point of sale terminals throughout the world. In addition to traditional deposit-taking and lending services, we also provide a variety of checking accounts, savings programs, night depository services, safe deposit facilities and credit card plans.

     The banking industry is significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, the housing industry and financial institutions. Deposits at commercial banks are influenced by economic conditions, including interest rates and competing investment instruments, levels of personal income and savings, among others. Lending activities are also influenced by a number of economic factors, including demand for and supply of housing, conditions in the construction industry, local economic and seasonal factors and availability of funds. Our primary sources of funding for lending activities include savings and demand deposits, income from investments, loan principal payments and borrowings. For additional information relating to our deposits and loans, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

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     Market Areas. Our primary market areas are Sevier and Blount Counties, contiguous counties located in eastern Tennessee. We intend to continue our focus on these primary market areas in the future. Additionally, even with our current market area focus, some of our business may come from other areas contiguous to our primary market area.

Lending Activities

     General. We concentrate on developing a diversified loan portfolio consisting of first mortgage loans secured by residential properties, loans secured by commercial properties and other commercial and consumer loans.

     Real Estate Lending. We originate permanent and construction loans having terms in the case of the permanent loans of up to 30 years that are typically secured by residential real estate comprised of single-family dwellings and multi-family dwellings of up to four units. All of our residential real estate loans consist of conventional loans that are not insured or guaranteed by government agencies. We also originate and hold in our portfolio traditional fixed-rate mortgage loans in appropriate circumstances.

     Consumer Lending. We originate consumer loans that typically fall into the following categories:

• loans secured by junior liens on real estate, including home improvement and home equity loans, which have an average maturity of about three years and generally are limited to 80% of appraised value;

• loans secured by personal property, such as automobiles, recreational vehicles or boats, which typically have 36 to 60 month maturities;

• loans to our depositors secured by their time deposit accounts or certificates of deposit;

• unsecured personal loans and personal lines of credit; and

• credit card loans.

     Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or that are secured by rapidly depreciating assets such as automobiles. Where consumer loans are unsecured or secured by depreciating assets, the absence of collateral or the insufficiency of any repossessed collateral to serve as an adequate source of repayment of the outstanding loan balance poses greater risk of loss to us. When a deficiency exists between the outstanding balance of a defaulted loan and the value of collateral repossessed, the borrower’s financial instability and life situations that led to the default (which may include job loss, divorce, illness or personal bankruptcy, among other things) often does not warrant substantial further collection efforts. Furthermore, the application of various federal and state laws, including federal bankruptcy and state insolvency laws, may limit the amount that we can recover in the event a consumer defaults on an unsecured or undersecured loan.

     Construction Lending. We offer single-family residential construction loans to borrowers for construction of one-to-four family residences in our primary market area. Generally, we limit our construction lending to construction-permanent loans and make these loans to individuals

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building their primary residences. We also originate construction loans to selected local builders for construction of single-family dwellings.

     Our construction loans may have fixed or adjustable interest rates and are underwritten in accordance with the same standards that we apply to permanent mortgage loans, with the exception that our construction loans generally provide for disbursement of the loan amount in stages during a construction period of up to 12 months, during which period the borrower is required to make monthly payments of accrued interest on the outstanding loan balance. We typically require a maximum loan-to-value ratio of 80% on construction loans we originate. While our construction loans generally convert to permanent loans following construction, the construction loans we extend to builders generally require repayment in full upon the completion of construction, or, alternatively, may be assumed by the borrower.

     Construction lending affords us the opportunity to earn higher interest rates and fees with shorter terms to maturity than does single-family permanent mortgage lending. Construction lending, however, is generally considered to involve a higher degree of risk than single-family permanent mortgage lending because of the inherent difficulty in estimating both a property’s value at completion of the project and the projected cost of the project. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to complete the project. If the estimate of value upon completion proves inaccurate, we may be confronted at, or prior to, the maturity of the loan with collateral of insufficient value to assure full repayment. Construction projects may also be jeopardized by downturns in the economy or demand in the area where the project is being undertaken, disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to builders to construct homes for which no purchaser has been identified carry more risk because the builder’s ability to repay the loan is often dependent on the builder’s ability to sell the property prior to the time the construction loan becomes due. We seek to address these risks by adhering to underwriting policies and disbursement procedures designed to limit the risk and by monitoring the construction project.

     Commercial Lending. We originate secured and unsecured loans for commercial, corporate, business and agricultural purposes, and we engage in commercial real estate activities consisting of loans for hotels, motels, restaurants, retail store outlets and service providers such as insurance agencies. Currently, we concentrate our commercial lending efforts on originating loans to small businesses for purposes of providing working capital, capital improvements, and construction and leasehold improvements. These loans typically have one-year maturities, if they are unsecured loans, or, in the case of small business loans secured by real estate, have an average maturity of five years. We also participate in the Small Business Administration’s guaranteed commercial loan program.

     Commercial lending, while generally considered to involve a higher degree of credit risk than long-term financing of residential properties, generally provides higher yields and greater interest rate sensitivity than do residential mortgage loans. Commercial loans are generally adjustable rate loans or loans that have short-term maturities of one to three years. The higher risks inherent in commercial lending include risks specific to the business venture, delays in leasing the collateral and excessive collateral dependency, vacancy, delays in obtaining or inability to obtain permanent financing and difficulties we may experience in exerting influence over or acquiring the collateral following a borrower’s default. Moreover, commercial loans

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often carry larger loan balances to single borrowers or groups of related borrowers than do residential real estate loans. With respect to commercial real estate lending, the borrower’s ability to make principal and interest payments on loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market or in the economy generally. We attempt to mitigate the risks inherent in commercial lending by, among other things, securing our loans with adequate collateral and extending commercial loans only to persons located in our primary market area.

     Creditworthiness and Collateral. We require each prospective borrower to complete a detailed loan application which we use to evaluate the applicant’s creditworthiness. All loan applications are reviewed and approved or disapproved in accordance with guidelines established by the Bank’s Board of Directors. We also require that loan collateral be appraised by an in house evaluation or by independent appraisers approved by the Bank’s Board of Directors and require borrowers to maintain fire and casualty insurance on collateral in accordance with guidelines established by the Bank’s Board of Directors. Title insurance is required for most real property collateral.

     Loan Originations. We originate loans primarily for our own portfolio but, subject to market conditions, we may sell certain loans we originate in the secondary market. Initially, most of our loans are originated based on referrals and to walk-in customers. We also use various methods of local advertising to stimulate originations.

     Secondary Market Activities. We engage in secondary mortgage market activities, principally the sale of certain residential mortgage loans on a servicing released basis, subject to market conditions. Secondary mortgage market activities permit us to generate fee income and sale income to supplement our principal source of income — net interest income resulting from the interest margin between the yield on interest-earning assets like loans and investment securities and the interest paid on interest-bearing liabilities such as savings deposits, time deposit certificates and funds borrowed by the Bank.

     From time to time we originate a limited number of permanent, conventional residential mortgage loans that we sell on a servicing-released basis to private institutional investors such as savings institutions, banks, life insurance companies and pension funds. We originate these loans on terms and conditions similar to those required for sale to the Federal Home Loan Mortgage Corporation (“FHLMC”), and the Federal National Mortgage Association (“FNMA”), except that we occasionally offer these loans with higher dollar limits than are permissible for FHLMC or FNMA-eligible loans.

     The loan-to-value ratios we require for the residential mortgage loans we originate are determined based on guidelines established by the Bank’s Board of Directors pursuant to applicable law.

     Income from Lending Activities. Our lending activities generate interest and loan origination fee income. Loan origination fees are calculated as a percentage of the principal amount of the mortgage loans we originate and are charged to the borrower by the Bank for originating the loan. We also receive loan fees and charges related to existing loans, which include late charges and assumption fees.

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     Loan Delinquencies and Defaults. When a borrower fails to make a required loan payment for 30 days, we classify the loan as delinquent. If the delinquency exceeds 90 days and is not cured through the Bank’s normal collection procedures, we institute more formal recovery efforts. If a foreclosure action is initiated and the loan is not reinstated, paid in full or refinanced, the property is sold at a judicial or trustee sale at which, in some instances, the Bank acquires the property. Thereafter, such acquired property is recorded in the Bank’s records as “other real estate owned” until the property is sold. In some cases, we may finance sales of other real estate owned, which may involve our origination of “loans to facilitate” that typically involve a lower down payment or a longer term.

Investment Activities

     Our investment securities portfolio is an integral part of our total assets and liabilities management strategy. We use our investments, in part, to further our interest rate risk management objective of reducing our sensitivity to interest-rate fluctuations. Our primary objective in making investment determinations with respect to our securities portfolio is to achieve a high degree of maturity and rate matching between these assets and our interest-bearing liabilities. In order to achieve this goal, we concentrate our investments, which constituted approximately 15.3% of our total assets at December 31, 2007, in U.S. government securities or other securities of similar low risk. The U.S. government and other investment-grade securities in which we invest typically have maturities ranging from 30 days to 30 years.

Sources of Funds

     General. Deposits are the primary source of funds we use to support our lending activities and other general business activities. Other sources of funds include loan repayments, loan sales and borrowings. Although deposit activity is significantly influenced by fluctuations in interest rates and general market conditions, loan repayments are a relatively stable source of funds. We also use short-term borrowings to compensate in periods where our normal funding sources are insufficient to satisfy our funding needs. We use long-term borrowings to support extended activities and to extend the term of our liabilities.

     Deposits. We offer a variety of programs designed to attract both short-term and long-term deposits from the general public in our market areas. These programs include savings accounts, NOW accounts, demand deposit accounts, money market deposit accounts, fixed-rate and variable-rate certificate of deposit accounts of varying maturities, retirement accounts and certain other accounts. We particularly focus on promoting long-term deposits, such as IRA accounts and certificates of deposit. Additionally, we use brokered deposits that are comparable to our traditional certificates of deposit.

     Borrowings. The Bank became a member of the Federal Home Loan Bank of Cincinnati (the “FHLB of Cincinnati”) in December 2001. The FHLB of Cincinnati functions as a central reserve bank that provides credit for member institutions. As a member, the Bank is required to own capital stock in the FHLB of Cincinnati. Membership in the FHLB of Cincinnati entitles the Bank, provided certain standards related to creditworthiness have been met, to apply for advances on the security of the FHLB of Cincinnati stock it holds as well as on the security of certain of its residential mortgage loans, commercial loans and other assets (principally, its investment

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securities that are obligations of, or guaranteed by, the United States). The FHLB of Cincinnati makes advances to the Bank pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. Interest rates on FHLB of Cincinnati advances are generally variable and adjust to reflect actual conditions existing in the credit markets. The uses for which we may employ funds received pursuant to FHLB of Cincinnati advances are prescribed by the various lending programs, which also prescribe borrowing limitations. Acceptable uses prescribed by the FHLB of Cincinnati have included expansion of residential mortgage lending and funding short-term liquidity needs. Depending on the particular credit program under which we borrow, borrowing limitations are generally based on the FHLB of Cincinnati’s assessment of our creditworthiness. The FHLB of Cincinnati is required to review the credit limitations and standards to which we are subject at least once every six months.

     Financing. In August of 1998, the Bank completed an offering of common stock which yielded proceeds of $12,000,000. On November 7, 2003, the Company completed the sale, through its wholly owned statutory trust subsidiary, MNB Capital Trust I, of $5,500,000 of trust preferred securities, which we refer to as “Capital Securities I,” which mature on December 31, 2033, and have a liquidation amount of $50,000 per Capital Security. Interest on the Capital Securities I is to be paid quarterly on the last day of each March, June, September and December and is reset quarterly based on the three-month LIBOR plus 305 basis points. The Company used the net proceeds from the offering of Capital Securities I to pay off an outstanding line of credit.

     On June 20, 2006, the Company completed the sale, through its wholly owned statutory trust subsidiary, MNB Capital Trust II, of $7,500,000 of trust preferred securities, which we refer to as “Capital Securities II,” which mature on July 7, 2036, and have a liquidation amount of $1,000 per Capital Security. Interest on the Capital Securities II is to be paid quarterly on the seventh day of each January, April, July and October and is reset quarterly based on the three-month LIBOR plus 160 basis points. The Company used the net proceeds from the offering of Capital Securities II to increase regulatory capital for the Company and for operating funds for the Bank.

     During the third quarter of 2005, the Company sold 416,500 shares of common stock. This sale resulted in an increase in common stock and surplus of approximately $9,896,500. In connection with the offering, there were 416,500 warrants issued, one warrant for each share of stock sold, that had an exercise price of $25.20 per warrant. The warrants could be exercised beginning after one year from the date of the sale of the common stock, and had to be exercised no later than two years from the date of the sale. The final day to exercise the common stock warrants was September 7, 2007. During the period in which they could be exercised, 476,194 out of 482,151 (adjusted for 5% stock dividends) warrants were exercised at a weighted average exercise price of $21.77 (adjusted for 5% stock dividends). The total corresponding increase to shareholders’ equity from the conversion of the stock warrants to common stock from September 7, 2006 to September 7, 2007, the period the warrants could be exercised, was approximately $10,367,000.

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Competition

     We face significant competition in our primary market areas from a number of sources, including eight commercial banks and one savings institution in Sevier County and eleven commercial banks and one savings institution in Blount County. As of June 30, 2007, there were 50 commercial bank branches and three savings institutions branches located in Sevier County and 44 commercial bank branches and one savings institution branch located in Blount County.

     The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and other recent federal and state laws have resulted in increased competition from both conventional banking institutions and other businesses offering financial services and products. Mortgage banking firms, finance companies, real estate investment trusts, insurance companies, leasing companies, factors and certain government agencies provide additional competition for loans and for certain financial services. We also compete for deposit accounts with a number of other financial intermediaries, including securities brokerage firms, money market mutual funds, government and corporate securities and credit unions. The primary criteria on which institutions compete for deposits and loans are interest rates, loan origination fees and range of services offered.

     Most of our competitors have been in existence for a longer period of time, are better established, have substantially greater financial resources and have more extensive facilities than we do. Because of the size and established presence of our competitors in our market area, these competitors have longer-term customer relationships than we maintain and are able to offer a wider range of services than we offer.

     As evidenced by our deposit and loan growth, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” we have been able to compete with our larger, more established competitors by attracting customers from existing financial institutions as well as from growth in our communities by focusing on providing a high level of customer service and by providing the products most important to our customers. During our relatively short operating history, we have been successful in hiring a staff with significant local bank experience that shares our commitment to providing our customers with the highest levels of customer service. While focusing on customer service, we are also able to offer our customers most of the banking services offered by our local competitors, including Internet banking, investment services and sweep accounts.

Employees

     We currently employ a total of 176 employees, including 172 full time employees. We are not a party to any collective bargaining agreements with our employees, and we consider relations with our employees to be good.

Seasonality

     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. Deposit growth generally slows during the

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first quarter each year and then increases during each of the last three quarters. Our cost of funds tends to increase during the first quarter each year due to our dependence on borrowed funds that typically have a higher interest rate than our core deposits. Growth in the tourism industry in Sevier County has remained strong during recent years and we anticipate that this trend will continue.

Supervision and Regulation

Supervision and Regulation

     Bank holding companies and banks are extensively regulated under federal and state law. This discussion is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be a complete description of the statutes or regulations applicable to the Company’s and the Bank’s business. Supervision, regulation, and examination of the Company and the Bank and their respective subsidiaries by the bank regulatory agencies are intended primarily for the protection of bank depositors rather than holders of Company capital stock. Any change in applicable law or regulation may have a material effect on the Company’s business.

Bank Holding Company Regulation

     The Company, as a bank holding company, is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (“Federal Reserve”) under the BHC Act. Bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the Federal Reserve determines to be so closely related to banking, or managing or controlling banks, as to be a proper incident thereto. The Company is required to file with the Federal Reserve periodic reports and such other information as the Federal Reserve may request. The Federal Reserve examines the Company, and may examine non-bank subsidiaries the Company may acquire.

     The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With certain exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company, and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company, may, however, engage in or acquire an interest in a company that engages in activities which the Federal Reserve has determined by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

     The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) substantially revised the statutory restrictions separating banking activities from certain other financial activities. Under the GLB Act, bank holding companies that are “well-capitalized” and “well-managed”, as defined in Federal Reserve Regulation Y, which have and maintain “satisfactory” Community Reinvestment Act (“CRA”) ratings, and meet certain other conditions, can elect to become “financial holding companies”. Financial holding companies and their subsidiaries are permitted

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to acquire or engage in previously impermissible activities such as insurance underwriting, securities underwriting, travel agency activities, broad insurance agency activities, merchant banking, and other activities that the Federal Reserve determines to be financial in nature or complementary thereto. In addition, under the merchant banking authority added by the GLB Act and Federal Reserve regulation, financial holding companies are authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the term of its investment and does not manage the company on a day-to-day basis, and the invested company does not cross-market with any of the financial holding company’s controlled depository institutions. Financial holding companies continue to be subject to the overall oversight and supervision of the Federal Reserve, but the GLB Act applies the concept of functional regulation to the activities conducted by subsidiaries. For example, insurance activities would be subject to supervision and regulation by state insurance authorities. While the Company has no present plans to become a financial holding company, it may elect to do so in the future in order to exercise the broader activity powers provided by the GLB Act. The GLB Act also includes consumer privacy provisions, and the federal bank regulatory agencies have adopted extensive privacy rules implementing the GLB Act.

     The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company. The Company and the Bank are subject to Section 23A of the Federal Reserve Act and Federal Reserve Regulation W thereunder. Section 23A defines “covered transactions”, which include extensions of credit, and limits a bank’s covered transactions with any affiliate to 10% of such bank’s capital and surplus. All covered and exempt transactions between a bank and its affiliates must be on terms and conditions consistent with safe and sound banking practices, and banks and their subsidiaries are prohibited from purchasing low-quality assets from the bank’s affiliates. Finally, Section 23A requires that all of a bank’s extensions of credit to its affiliates be appropriately secured by acceptable collateral, generally United States government or agency securities. The Company and the Bank also are subject to Section 23B of the Federal Reserve Act, which generally limits covered and other transactions among affiliates to be on terms, including credit standards, that are substantially the same or at least as favorable to the bank or its subsidiary as those prevailing at the time for similar transactions with unaffiliated companies.

     The BHC Act permits acquisitions of banks by bank holding companies, such that Mountain National and any other bank holding company located in Tennessee may now acquire a bank located in any other state, and any bank holding company located outside Tennessee may lawfully acquire any bank based in another state, subject to certain deposit-percentage, age of bank charter requirements, and other restrictions. Federal law also permits national and state-chartered banks to branch interstate through acquisitions of banks in other states. Under Tennessee law, in order for an out-of-state bank or bank holding company to establish a branch in Tennessee, the bank or bank holding company must purchase an existing bank, bank holding company, or branch of a bank in Tennessee which has been in existence for at least three years. De novo interstate branching is permitted under Tennessee law on a reciprocal basis. The Bank is eligible to be acquired by any bank or bank holding company, whether inter-or intrastate, since it has now been in existence for three years.

     Federal Reserve policy requires a bank holding company to act as a source of financial strength and to take measures to preserve and protect bank subsidiaries in situations where

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additional investments in a troubled bank may not otherwise be warranted. In addition, under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), where a bank holding company has more than one bank or thrift subsidiary, each of the bank holding company’s subsidiary depository institutions are responsible for any losses to the FDIC as a result of an affiliated depository institution’s failure. As a result, a bank holding company may be required to loan money to its subsidiaries in the form of capital notes or other instruments that qualify as capital under regulatory rules. However, any loans from the holding company to such subsidiary banks likely will be unsecured and subordinated to such bank’s depositors and perhaps to other creditors of the bank.

Bank Regulation

     The Bank is subject to supervision, regulation, and examination by the OCC which monitors all areas of the operations of the Bank, including reserves, loans, mortgages, issuances of securities, payment of dividends, establishment of branches, capital adequacy, and compliance with laws. The Bank is a member of the FDIC and, as such, its deposits are insured by the FDIC to the maximum extent provided by law. See “FDIC Insurance Assessments”.

     While the OCC has authority to approve branch applications, national banks are required by the National Bank Act to adhere to branching laws applicable to state chartered banks in the states in which they are located. With prior regulatory approval, Tennessee law permits banks based in the state to either establish new or acquire existing branch offices throughout Tennessee and in other states on a reciprocal basis. Mountain National and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable states’ laws. Tennessee law, with limited exceptions, currently permits branching across state lines either through interstate merger or branch acquisition. Tennessee, however, only permits an out-of-state bank, short of an interstate merger, to branch into Tennessee through branch acquisition if the home state of the out-of-state bank permits Tennessee-based banks to acquire branches there.

     The OCC has adopted a series of revisions to its regulations, including expanding the powers exercisable by operating subsidiaries of the Bank. These changes also modernize and streamline corporate governance, investment and fiduciary powers. The OCC also has the ability to preempt state laws purporting to regulate the activities of national banks.

     The OCC has adopted the Federal Financial Institutions Examination Council’s (“FFIEC”) rating system and assigns each financial institution a confidential composite rating based on an evaluation and rating of six essential components of an institution’s financial condition and operations including Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to market risk, as well as the quality of risk management practices. For most institutions, the FFIEC has indicated that market risk primarily reflects exposures to changes in interest rates. When regulators evaluate this component, consideration is expected to be given to: (i) management’s ability to identify, measure, monitor, and control market risk; (ii) the institution’s size; (iii) the nature and complexity of its activities and its risk profile; and (iv) the adequacy of its capital and earnings in relation to its level of market risk exposure. Market risk is rated based upon, but not limited to, an assessment of the sensitivity of the financial institution’s earnings or the economic value of its capital to adverse changes in interest rates, foreign exchange rates, commodity prices, or equity prices; management’s ability to identify,

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measure, monitor, and control exposure to market risk; and the nature and complexity of interest rate risk exposure arising from nontrading positions.

     The GLB Act requires banks and their affiliated companies to adopt and disclose privacy policies regarding the sharing of personal information they obtain from their customers with third parties. GLB also permits bank subsidiaries to engage in “financial activities” through subsidiaries similar to those permitted to financial holding companies. See the discussion regarding GLB in “Bank Holding Company Regulation” above.

Community Reinvestment Act

     The Company and the Bank are subject to the CRA and the federal banking agencies’ regulations. Under the CRA, all banks and thrifts have a continuing and affirmative obligation, consistent with their safe and sound operation to help meet the credit needs for their entire communities, including low and moderate income neighborhoods. The CRA requires a depository institution’s primary federal regulator, in connection with its examination of the institution, to assess the institution’s record of assessing and meeting the credit needs of the communities served by that institution, including low- and moderate-income neighborhoods. The regulatory agency’s assessment of the institution’s record is made available to the public. Further, such assessment is required of any institution which has applied to: (i) charter a national bank; (ii) obtain deposit insurance coverage for a newly-chartered institution; (iii) establish a new branch office that accepts deposits; (iv) relocate an office; (v) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution, or (vi) expand other activities, including engaging in financial services activities authorized by the GLB Act. A less than satisfactory CRA rating will slow, if not preclude, expansion of banking activities and prevent a company from becoming a financial holding company. The Bank has a satisfactory CRA rating.

     The GLB Act and federal bank regulations have made various changes to the CRA. Among other changes, CRA agreements with private parties must be disclosed and annual CRA reports must be made to a bank’s primary federal regulator. A bank holding company will not be permitted to become or remain a financial holding company and no new activities authorized under the GLB Act may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “satisfactory” CRA rating in its latest CRA examination. The OCC and other federal bank regulators have revised their CRA regulations. The Bank has grown from small bank status to the newly created intermediate small bank status. The requirements for an intermediate small bank to meet its CRA objectives are more stringent than those for a small bank, but less so than those for large banks.

     The Bank is also subject to, among other things, the provisions of the Equal Credit Opportunity Act (the “ECOA”) and the Fair Housing Act (the “FHA”), both of which prohibit discrimination based on race or color, religion, national origin, sex, and familial status in any aspect of a consumer or commercial credit or residential real estate transaction. In 1994, the Department of Housing and Urban Development, the Department of Justice (the “DOJ”), and the federal banking agencies issued an Interagency Policy Statement on Discrimination in Lending in order to provide guidance to financial institutions in determining whether discrimination exists, how the agencies will respond to lending discrimination, and what steps lenders might

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take to prevent discriminatory lending practices. The DOJ has also increased its efforts to prosecute what it regards as violations of the ECOA and FHA.

Sarbanes-Oxley Act

     We are required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the SEC and the Public Company Accounting Oversight Board thereunder. In particular, we are required to include management reports on internal controls as part of our annual report for the year ended December 31, 2007, pursuant to Section 404 of the Sarbanes-Oxley Act. We have spent significant amounts of time and money on compliance with these rules and anticipate a similar burden going forward. We completed our assessment of our internal controls in a timely manner and management’s report on internal controls is included in Item 9A(T) of this report. Our failure to comply with these internal control rules may materially adversely affect our reputation, our ability to obtain the necessary certifications to our financial statements, and the values of our securities.

Payments of Dividends

     The Company is a legal entity separate and distinct from its bank. The prior approval of the OCC is required if the total of all dividends declared by a national bank (such as the Bank) in any calendar year will exceed the sum of such bank’s net profits for the year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits any national bank from paying dividends that would be greater than such bank’s undivided profits after deducting statutory bad debts in excess of such bank’s allowance for possible loan losses.

     In addition, the Company and the Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a national or state member bank or a bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The OCC and the Federal Reserve have indicated that paying dividends that deplete a national or state member bank’s capital base to an inadequate level would be an unsound and unsafe banking practice. The OCC and the Federal Reserve have each indicated that depository institutions and their holding companies should generally pay dividends only out of current operating earnings.

Capital

     The Federal Reserve and the OCC have risk-based capital guidelines for bank holding companies and national banks, respectively. These guidelines require a minimum ratio of capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must consist of common equity, retained earnings and a limited amount of qualifying preferred stock, less goodwill and certain core deposit intangibles (“Tier 1 capital”). Voting common equity must be the predominant form of capital. The remainder may consist of non-qualifying preferred stock, qualifying subordinated, perpetual, and/or mandatory convertible debt, term subordinated debt and intermediate term preferred stock

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and up to 45% of pretax unrealized holding gains on available for sale equity securities with readily determinable market values that are prudently valued, and a limited amount of any loan loss allowance (“Tier 2 capital” and, together with Tier 1 capital, “Total Capital”).

     In addition, the Federal Reserve and the OCC have established minimum leverage ratio guidelines for bank holding companies and national banks, which provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets (“leverage ratio”) equal to 3%, plus an additional cushion of 1.0% to 2.0%, if the institution has less than the highest regulatory rating. The guidelines also provide that institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Higher capital may be required in individual cases depending upon a bank holding company’s risk profile. All bank holding companies and banks are expected to hold capital commensurate with the level and nature of their risks, including the volume and severity of their problem loans. Lastly, the Federal Reserve’s guidelines indicate that the Federal Reserve will continue to consider a “tangible Tier 1 leverage ratio” (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve and OCC have not advised the Company or the Bank of any specific minimum leverage ratio or tangible Tier 1 leverage ratio applicable to them.

     The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal banking agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”. A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.

     All of the federal banking agencies have adopted regulations establishing relevant capital measures and relevant capital levels. The relevant capital measures are the Total Capital ratio, Tier 1 capital ratio, and the leverage ratio. Under the regulations, a national bank will be (i) well capitalized if it has a Total Capital ratio of 10% or greater, a Tier 1 capital ratio of 6% or greater, and a leverage ratio of at least 5%, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure, (ii) adequately capitalized if it has a Total Capital ratio of 8% or greater, a Tier 1 capital ratio of 4% or greater, and a leverage ratio of 4% or greater (3% in certain circumstances), (iii) undercapitalized if it has a Total Capital ratio of less than 8%, a Tier 1 capital ratio of less than 4% (3% in certain circumstances), (iv) significantly undercapitalized if it has a total capital ratio of less than 6% or a Tier I capital ratio of less than 3%, or a leverage ratio of less than 3%, or (v) critically undercapitalized if its tangible equity is equal to or less than 2% of average quarterly tangible assets.

     On March 1, 2005, the Federal Reserve adopted changes to its capital rules that permit qualified trust preferred securities and other restricted capital elements to be included as Tier 1 capital up to 25% of core capital, net of goodwill and intangibles. The Company expects that it will continue to treat its $13 million of trust preferred securities as Tier 1 capital subject to the limits listed above.

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     As of December 31, 2007, the consolidated capital ratios of the Bank were as follows:

	Regulatory Minimum to be
	Adequately Capitalized			Bank
Tier 1 capital ratio		4.0	%		13.10	%
Total capital ratio		8.0	%		13.97	%
Leverage ratio		3.0-5.0	%		11.24	%

FDICIA

     FDICIA directs that each federal banking regulatory agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares, and such other standards as the federal regulatory agencies deem appropriate.

     FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan for approval. For a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of 5% of the depository institution’s total assets at the time it became undercapitalized and the amount necessary to bring the institution into compliance with applicable capital standards.

     FDICIA also contains a variety of other provisions that may affect the operations of the Company and the Bank, including reporting requirements, regulatory standards for real estate lending, “truth in savings” provisions, the requirement that a depository institution give 90 days’ prior notice to customers and regulatory authorities before closing any branch, and a prohibition on the acceptance or renewal of brokered deposits by depository institutions that are not well capitalized or are adequately capitalized and have not received a waiver from the FDIC. The Bank is well capitalized, and brokered deposits are not restricted.

Enforcement Policies and Actions

     The Federal Reserve and the OCC monitor compliance with laws and regulations. Violations of laws and regulations, or other unsafe and unsound practices, may result in these agencies imposing fines or penalties, cease and desist orders, or taking other enforcement actions. Under certain circumstances, these agencies may enforce these remedies directly against officers, directors, employees and others participating in the affairs of a bank or bank holding company.

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Fiscal and Monetary Policy

     Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a bank’s earnings. Thus, the earnings and growth of Mountain National and the Bank are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the discount rate at which banks may borrow from the Federal Reserve, and the reserve requirements on deposits. The nature and timing of any changes in such policies and their effect on Mountain National and its subsidiary cannot be predicted. Beginning in September 2007, the Federal Reserve reduced the targeted federal funds rate three times during 2007 for a total of 1.00%. Beginning in August 2007, the Federal Reserve also reduced the discount rate four times during 2007 for a total of 1.50%.

FDIC Insurance Assessments

     The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. In early 2006, Congress passed the Federal Deposit Insurance Reform Act of 2005, which made certain changes to the Federal deposit insurance program. These changes included merging the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund, increasing retirement account coverage to $250,000 and providing for inflationary adjustments to general coverage beginning in 2010, providing the FDIC with authority to set the fund’s reserve ratio within a specified range, and requiring dividends to banks if the reserve ratio exceeds certain levels. The new statute grants banks an assessment credit based on their share of the assessment base on December 31, 1996, and the amount of the credit can be used to reduce assessments in any year subject to certain limitations. Because it was not organized until 1998, the Bank will not be eligible to receive this one-time assessment credit.

     The Bank is subject to FDIC deposit insurance assessments. The FDIC assesses deposits under a risk-based premium schedule. Each financial institution is assigned to one of three capital groups, “well capitalized,” “adequately capitalized” or “undercapitalized,” and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution’s primary federal and, if applicable, state regulators and other information relevant to the institution’s financial condition and the risk posed to the applicable insurance fund. The actual assessment rate applicable to a particular institution, therefore, depends in part upon the risk assessment classification so assigned to the institution by the FDIC.

     The Deposit Insurance Funds Act of 1996 (the “Funds Act”) authorized the Financing Corporation (“FICO”) to levy assessments on DIF-assessable deposits. The FICO assessments are set quarterly and ranged from 1.44 basis points for the BIF in the first quarter of 2005 to 1.34 basis points in the last quarter of 2005, from 1.32 basis points in the first quarter of 2006 to 1.24 basis points in the last quarter of 2006, and from 1.22 basis points in the first quarter of 2007 to 1.14 basis points in the last quarter of 2007. The FICO assessment rate for the first quarter of 2008 is 1.12 basis points.

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     During the three years ended December 31, 2007, the Bank paid $44,815.83, $38,291.06 and $33,911.33 in FICO assessments during 2007, 2006 and 2005, respectively. The Bank paid $154,734.23 during 2007 for FDIC deposit insurance premiums.

Other Laws and Regulations

     The International Money Laundering Abatement and Anti-Terrorism Funding Act of 2001 specifies “know your customer” requirements that obligate financial institutions to take actions to verify the identity of the account holders in connection with opening an account at any U.S. financial institution. Banking regulators will consider compliance with this Act’s money laundering provisions in acting upon acquisition and merger proposals, and sanctions for violations of this Act can be imposed in an amount equal to twice the sum involved in the violating transaction, up to $1 million.

     The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”). Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as to enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps —

• 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 USA PATRIOT Act requires financial institutions to establish anti-money laundering programs, and sets forth minimum standards for these programs, including:

• 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.

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     In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities.

Legislative and Regulatory Changes

     Legislative and regulatory proposals regarding changes in banking, and the regulation of banks, thrifts and other financial institutions and bank and bank holding company powers are being considered by the executive branch of the Federal government, Congress and various state governments, including Tennessee. Other proposals pending in Congress would, among other things, allow banks to pay interest on checking accounts, allow the Federal Reserve to pay interest on deposits, and would permit interstate branching on a de novo basis. Certain of these proposals, if adopted, could significantly change the regulation or operations of banks and the financial services industry. It cannot be predicted whether any of these proposals will be adopted, and, if adopted, how these proposals will affect the Company and the Bank.

Statistical Information

     Certain statistical and financial information (as required by Guide 3) is included in response to Item 6 and 7 of this Annual Report on Form 10-K.

ITEM 1A. RISK FACTORS

We have a concentration of credit exposure to borrowers dependent on the tourism industry.

     Due to the predominance of the tourism industry in Sevier County, Tennessee, which is adjacent to the Great Smoky Mountains National Park and the home of the Dollywood theme park, a significant portion of the Bank’s 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 in other market areas. The Bank maintains ten primary concentrations of credit by industry, of which five are directly related to the tourism industry. At December 31, 2007, approximately $179 million in loans, representing approximately 45% of our total loans, were to businesses and individuals whose ability to repay depends to a significant extent on the tourism industry in the markets we serve. We also have additional loans that would be considered related to the tourism industry in addition to the five categories included in the industry concentration amounts noted above. Growth of the tourism industry in Sevier County has remained strong during recent years and we anticipate that this trend will continue; however, if the tourism industry experiences an economic slowdown and, as a result, the borrowers in this industry are unable to perform their obligations under their existing loan agreements, our earnings could be negatively impacted, causing the value of our common stock to decline.

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We are geographically concentrated in Sevier County and Blount County, Tennessee, and changes in local economic conditions impact our profitability.

     We operate primarily in Sevier County and Blount County, Tennessee, and substantially all of our loan customers and most of our deposit and other customers live or have operations in Sevier and Blount Counties. Accordingly, our success significantly depends upon the growth in population, income levels, deposits and housing starts in both counties, along with the continued attraction of business ventures to the area. Our profitability is impacted by the changes in general economic conditions in this market. Additionally, unfavorable local or national economic conditions could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations.

     We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

Our continued growth may require the need for additional capital and further regulatory approvals which, if not obtained, could adversely impact our profitability and implementation of our current business plan.

     To continue to grow, we will need to provide sufficient capital to the Bank through earnings generation, additional equity offerings, the issuance of additional trust preferred securities or borrowed funds or any combination of these sources of funds. Should we incur indebtedness, we could be required to obtain certain regulatory approvals beforehand if we are not well-capitalized under regulatory standards. Should our growth exceed our expectations, we may need to raise additional capital over our projected capital needs. However, our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand and grow our operations could be materially impaired. Should we not be able to obtain such approvals or otherwise not be able to grow our asset base, our ability to attain our long-term profitability goals will be more difficult.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

     If loan customers with significant loan balances fail to repay their loans according to the terms of these loans, our earnings would suffer. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of any collateral securing the repayment of our loans. We maintain an allowance for loan losses in an attempt to cover the inherent risks associated with lending. In determining the size of this allowance, we rely on an analysis of our loan portfolio based on volume and types of loans, internal loan classifications, trends in classifications, volume and trends in delinquencies, nonaccruals and charge-offs, national and local economic conditions, other factors and other pertinent information. If our assumptions are inaccurate, our current allowance may not be

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sufficient to cover potential loan losses, and additional provisions may be necessary which would decrease our earnings.

     In addition, federal and state regulators periodically review our loan portfolio and may require us to increase our provision for loan losses or recognize loan charge-offs. Their conclusions about the quality of our loan portfolio may be different than ours. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a negative effect on our operating results.

Competition with other banking institutions could adversely affect our profitability.

     We face significant competition in our primary market areas from a number of sources, currently including eight commercial banks and one savings institution in Sevier County and eleven commercial banks and one savings institution in Blount County. As of June 30, 2007, there were 50 commercial bank branches and three savings institutions branches located in Sevier County and 44 commercial bank branches and one savings institution branch located in Blount County.

     Most of our competitors have been in existence for a longer period of time, are better established, have substantially greater financial resources and have more extensive facilities than we do. Because of the size and established presence of our competitors in our market area, these competitors have longer-term customer relationships than we maintain and are able to offer a wider range of services than we offer.

Fluctuations in interest rates could reduce our profitability.

     Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense, our largest recurring expenditure. Interest rate fluctuations are caused by many factors which, for the most part, are not under our direct control. For example, national monetary policy plays a significant role in the determination of interest rates. Additionally, competitor pricing and the resulting negotiations that occur with our customers also impact the rates we collect on loans and the rates we pay on deposits.

     As interest rates change, we expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” may work against us, and our earnings may be negatively affected.

     Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. A decline in the market value of our assets may limit our ability to borrow additional funds or result in our lenders requiring additional collateral from us under our loan agreements. As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in order to maintain our liquidity. If those sales are made at prices lower than the amortized costs of the investments, we will incur losses.

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Our common stock is currently traded on the over-the-counter, or OTC, bulletin board and has substantially less liquidity than the average stock quoted on a national securities exchange.

     Although our common stock is publicly traded on the OTC bulletin board, our common stock has substantially less daily trading volume than the average trading market for companies quoted on the Nasdaq National Market, or any national securities exchange. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control.

     The market price of our common stock may fluctuate in the future, and these fluctuations may be unrelated to our performance. General market price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.

Loss of our senior executive officers or other key employees could impair our relationship with our customers and adversely affect our business.

     We have assembled a senior management team which has substantial background and experience in banking and financial services and in the Sevier County and Blount County, Tennessee banking markets. Loss of the services of any of these key personnel could negatively impact our business because of their skills, years of industry experience, customer relationships and the potential difficulty of promptly replacing them.

Our business is dependent on technology, and an inability to invest in technological improvements may adversely affect our results of operations and financial condition.

     The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. We have made significant investments in data processing, management information systems and internet banking accessibility. Our future success will depend in part upon our ability to create additional efficiencies in our operations through the use of technology, particularly in light of our past and projected growth strategy. Many of our competitors have substantially greater resources to invest in technological improvements. There can be no assurance that our technological improvements will increase our operational efficiency or that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

We are subject to various statutes and regulations that may limit our ability to take certain actions.

     We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends,

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mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth.

     The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

If a change in control or change in management is delayed or prevented, the market price of our common stock could be negatively affected.

     Certain federal and state regulations may make it difficult, and expensive, to pursue a tender offer, change in control or takeover attempt that our board of directors opposes. As a result, our shareholders may not have an opportunity to participate in such a transaction, and the trading price of our stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers.

ITEM 2. PROPERTIES

     The Bank currently operates from its main office in Sevierville, Tennessee and seven branch offices located in Gatlinburg, Pigeon Forge, Seymour, Kodak and Maryville, Tennessee. The main office, which is located at 300 East Main, Sevierville, Tennessee 37862, contains approximately 24,000 square feet and is owned by the Bank.

     The first Gatlinburg branch was built in 1999 and is located at 960 E. Parkway. It contains approximately 4,800 square feet. The Bank leases the land at this location. The lease expires in 2013 and includes renewal options for twelve additional five-year terms.

     The second Gatlinburg branch is a walk-up branch leased by the Bank located at 745 Parkway, which lies in the heart of the Gatlinburg tourist district. The lease expires in 2010 and includes two five-year renewal options through 2020.

     The Pigeon Forge branch, owned by the Bank, contains approximately 3,800 square feet and is located at 3104 Teaster Lane, Pigeon Forge, Tennessee.

     The second Pigeon Forge branch, owned by the Bank, contains approximately 3,800 square feet and is located at 242 Wears Valley Road, Pigeon Forge, Tennessee.

     The Seymour branch, owned by the Bank, contains approximately 3,800 square feet and is located on Chapman Highway, Seymour, Tennessee.

     The Kodak branch, owned by the Bank, contains approximately 3,800 square feet and is located on Winfield Dunn Parkway — Highway 66, Sevierville, Tennessee.

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     The Collier Drive branch, owned by the Bank, contains approximately 3,800 square feet and is located at 470 Collier Drive, Sevierville, Tennessee. This branch was under construction at December 31, 2007 and opened for business during the first quarter of 2008.

     The West Maryville branch, owned by the Bank, contains approximately 4,800 square feet and is located at 2403 US Highway 411 South, Maryville, Tennessee.

     The Operations Center, owned by the Bank, contains approximately 24,000 square feet and is located on Red Bank Road in Sevierville, Tennessee. We began construction of an additional 16,000 square feet during the fourth quarter of 2007 and we anticipate a completion date during the third quarter of 2008.

     In addition to our ten existing locations, we purchased two additional properties in Blount County, and one in Sevier County, Tennessee, for future branches. We have begun construction on both sites in Blount County with anticipated opening dates for a branch during the second quarter of 2008 and the Blount County Regional Office during the first quarter of 2009. We will have eleven branches when they are completed, including the Main and Regional offices. During the first quarter of 2007, we purchased one property in Sevier County and one property in Knox County, Tennessee, which we also intend to use for future branch sites. Plans for construction of the branch in Sevier County are currently being developed and we anticipate beginning construction during the third or fourth quarter of 2008.

     Management believes that the physical facilities maintained by the Bank are suitable for its current operations and that all properties are adequately covered by insurance.

ITEM 3. LEGAL PROCEEDINGS

     The Company is not aware of any material pending legal proceedings to which the Company or the Bank is a party or to which any of their properties are subject, other than ordinary routine legal proceedings incidental to the business of the Bank.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of the Company’s shareholders, through the solicitation of proxies or otherwise, during the fourth quarter of 2007.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     There is not a large market for the Company’s shares, which are quoted on the OTC Bulletin Board under the symbol “MNBT” and are not traded on any national exchange. Trading is generally limited to private transactions and, therefore, there is limited reliable information available as to the number of trades or the prices at which our stock has traded. Management has reviewed the limited information available regarding the range of prices at which the Company’s common stock has been sold. The following table sets forth, for the calendar periods indicated,

24

the range of high and low reported sales prices and the closing price for each period. This data is provided for information purposes only and should not be viewed as indicative of the actual or market value of our common stock:

	Market Price Range
	Per Share
Year/Period	High		Low
2007:	$	28.57	$	22.00
First Quarter		26.67		25.71
Second Quarter		27.67		25.71
Third Quarter		28.57		27.43
Fourth Quarter		27.43		22.00
2006:	$	27.21	$	23.54
First Quarter		24.62		23.54
Second Quarter		27.21		24.62
Third Quarter		26.85		25.04
Fourth Quarter		26.08		24.94

     On March 14, 2008, the last reported sale price for the common stock was $22.25 per share.

     These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. They have been adjusted to reflect the five percent stock dividends issued June 2006, February 2007 and March 2008.

     As of the date of this filing, the Company has approximately 2,000 holders of record of its common stock. The Company has no other class of securities issued or outstanding.

     Dividends from the Bank are the Company’s primary source of funds to pay dividends on its capital stock. Under the National Bank Act, the Bank may, in any calendar year, without the approval of the OCC, pay dividends to the extent of net profits for that year, plus retained net profits for the preceding two years (less any required transfers to surplus). The need to maintain adequate capital in the Bank also limits dividends that may be paid to the Company. The OCC and Federal Reserve have the general authority to limit the dividends paid by insured banks and bank holding companies, respectively, if such payment may be deemed to constitute an unsafe or unsound practice. If, in the particular circumstances, the OCC determines that the payment of dividends would constitute an unsafe or unsound banking practice, the OCC may, among other things, issue a cease and desist order prohibiting the payment of dividends. This rule is not expected to adversely affect the Bank’s ability to pay dividends to the Company. Additional information regarding restrictions on the ability of the Bank to pay dividends to the Company is contained in this report under “Item 1 — Business— Supervision and Regulation.”

     On June 23, 2006, we issued a five percent stock dividend to stockholders of record as of June 1, 2006. In lieu of fractional shares, we made a total cash payment of $23,002, based on a price of $27.85 per share, adjusted to reflect the five percent stock dividends issued during June

25

2006, February 2007 and March 2008. The total number of shares issued pursuant to the dividend was 90,878.

     On February 28, 2007, we issued a five percent stock dividend to stockholders of record as of February 15, 2007. In lieu of fractional shares, we made a total cash payment of $29,557, based on a price of $26.19 per share, adjusted to reflect the five percent stock dividend issued during March 2008. The total number of shares issued pursuant to the dividend was 96,361.

     On March 7, 2008, we issued a five percent stock dividend to stockholders of record as of February 15, 2008. In lieu of fractional shares, we made a cash payment totaling $17,802, based on a price of $24.00 per share. The total number of shares issued pursuant to the dividend was 124,718.

     No cash dividends have been declared or paid by the Company.

Issuer Purchases of Equity Securities

     On July 6, 2007, the Company announced the authorization by the Board of Directors of a repurchase plan of up to $500,000 of the Company’s common stock prior to June 27, 2008. The stock repurchases have been accomplished in private or open-market purchases and the timing of the repurchases and the number of shares of common stock to be purchased is dependent upon prevailing market conditions, share price, and other factors.

The following table provides certain information for the fourth quarter ended December 31, 2007 with respect to the Company’s repurchase of common stock.

					Total Number
					of Shares		Approximate Dollar
					Purchased as		Value of Shares
	Total Number				Part of Publicly		That May Yet Be
	of Shares		Average Price		Announced Plans		Purchased Under
	Purchased		Paid per Share		or Programs		the Plans or Programs
October 1-31, 2007		—	$	—		—	$	227,000
November 1-30, 2007		1,000		27.00		1,000		200,000
December 1-31, 2007		—		—		—		200,000
Total		1,000	$	27.00		1,000		200,000

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

     To better understand financial trends and performance, our management analyzes certain key financial data in the following pages. This analysis and discussion reviews our results of operations for the three-year period ended December 31, 2007, and our financial condition at December 31, 2006 and 2007. We have provided comparisons of financial data as of and for the fiscal years ended December 31, 2005, 2006 and 2007, to illustrate significant changes in performance and the possible results of trends revealed by that historical financial data. The following discussion should be read in conjunction with our consolidated audited financial

26

statements, including the notes thereto, and the selected consolidated financial data presented elsewhere in this Annual Report on Form 10-K.

Overview

     We conduct our business, which consists primarily of traditional commercial banking operations, through our wholly owned subsidiary, Mountain National Bank. Through the Bank we offer a broad range of traditional banking services from our corporate headquarters in Sevierville, Tennessee, and through eight additional branches in Sevier County and Blount County, Tennessee. Our banking operations primarily target individuals and small businesses in Sevier and Blount Counties and the surrounding area. The retail nature of the Bank’s commercial banking operations allows for diversification of depositors and borrowers, and we do not believe that the Bank is dependent upon a single or a few customers. Due to the predominance of the tourism industry in Sevier County, a significant portion of the Bank’s commercial loan portfolio is concentrated within that industry. The predominance of the tourism industry also makes our business more seasonal in nature, particularly with respect to deposit levels, than may be the case with banks in other market areas. Growth of the tourism industry in Sevier County has remained strong during recent years and we anticipate that this trend will continue.

Critical Accounting Policies

     Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices accepted within the banking industry. Our significant accounting policies are described in the notes to our consolidated financial statements. Certain accounting policies require management to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors that management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.

     We believe the following are the critical accounting policies that require the most significant estimates and assumptions and that are particularly susceptible to a significant change in the preparation of our financial statements.

Impairment of Investment Securities

     Management conducts regular reviews to assess whether the values of our investments are impaired and whether any such impairment is other than temporary. If management determines that the value of any investment is other-than-temporarily impaired, we record a charge against earnings equal to the amount of the impairment. The determination of whether other-than-temporary impairment has occurred involves significant assumptions, estimates and judgments by management. Changing economic conditions — global, regional or related to industries of specific issuers — could adversely affect these values. We recorded no other than temporary impairment of our investment securities during 2005, 2006 or 2007.

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Allowance and Provision for Loan Losses

     The allowance and provision for loan losses is based on management’s assessments of amounts that it deems to be adequate to absorb losses inherent in our existing loan portfolio. The allowance for loan losses is established through a provision for losses based on management’s evaluation of current economic conditions, volume and composition of the loan portfolio, the fair market value or the estimated net realizable value of underlying collateral, historical charge off experience, the level of nonperforming and past due loans, and other indicators derived from reviewing the loan portfolio. The evaluation includes a review of all loans on which full collection may not be reasonably assumed. Should the factors that are considered in determining the allowance for loan losses change over time, or should management’s estimates prove incorrect, a different amount may be reported for the allowance and the associated provision for loan losses. For example, if economic conditions in our market area undergo an unexpected and adverse change, we may need to increase our allowance for loan losses by taking a charge against earnings in the form of an additional provision for loan losses.

Results of Operations for the Years Ended December 31, 2007, 2006 and 2005

General Discussion of Our Results

Our principal source of revenue is net interest income at the Bank. Net interest income is the difference between:

• 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.

The level of net interest income is determined primarily by the average balances, or volume, of interest-earning assets and interest-bearing liabilities and the various rate spreads between the interest-earning assets and the Company’s funding sources. Changes in our net interest income from period to period result from, among other things:

• 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.

In 2007, 2006 and 2005, our other principal sources of revenue were service charges on deposit accounts, credit/debit card related income and gains on the sale of mortgage loans.

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Net Income

     Our results for the periods ended December 31, 2007, 2006 and 2005 were marked by the continued growth in loans and other earning assets as well as in deposits and FHLB borrowings, which resulted in increased revenues and expenses. The following is a summary of our results of operations (dollars in thousands except per share amounts):

	Years Ended December 31,						Dollar Change						Percent Change
	2007		2006		2005		2007 to 2006			2006 to 2005			2007 to 2006			2006 to 2005
Interest income	$	36,714	$	29,001	$	19,224	$	7,713		$	9,777			26.60	%		50.86	%
Interest expense		19,028		13,117		6,749		5,911			6,368			45.06	%		94.35	%
Net interest income		17,686		15,884		12,475		1,802			3,409			11.34	%		27.33	%
Provision for loan losses		982		915		446		67			469			7.32	%		105.16	%
Net interest income after provision for loan losses		16,704		14,969		12,029		1,735			2,940			11.59	%		24.44	%
Noninterest income		3,742		3,246		2,676		496			570			15.28	%		21.30	%
Noninterest expense		15,240		13,023		10,127		2,217			2,896			17.02	%		28.60	%
Net income before income taxes		5,206		5,192		4,578		14			614			0.27	%		13.41	%
Income tax expense		1,294		1,295		1,454		(1	)		(159	)		-0.08	%		-10.94	%
Net income	$	3,912	$	3,897	$	3,124	$	15		$	773			0.38	%		24.74	%
Total revenues	$	40,456	$	32,247	$	21,900	$	8,209		$	10,347			25.46	%		47.25	%
Total expenses		36,544		28,350		18,776		8,194			9,574			28.90	%		50.99	%
Basic earnings per share		1.68		1.93		1.81
Diluted earnings per share		1.61		1.79		1.69

     The slight increase in net income in 2007 as compared with 2006 was primarily attributable to the increase in net interest income. This increase was primarily due to the increase in total average loans of approximately $80,287,000 from December 31, 2006 to December 31, 2007. There was no change in the Fed Funds Rate by the Federal Reserve’s Federal Open Market Committee (“FOMC”) from June 2006 through August 2007, which created a stable interest rate environment. However, local competition caused our cost of funds to remain higher in light of the 100 basis point drop in the fed funds rate in the last four months of 2007 than would otherwise have been expected. The increase in income was somewhat offset by the 100 basis point decrease in the target federal funds rate during the last four months of 2007. This is due to our interest-earning assets repricing more frequently and more closely tracking changes in market interest rates than did our interest-bearing liabilities. The increase in noninterest expense also offset the increase in interest income and is due to the continued investment by the Bank in future branch locations and the expansion of our operations center coupled with the associated personnel costs of staffing for the future growth. Total expenses increased during 2007 as compared to 2006 primarily due to an increase in interest expense caused by the increase in interest bearing liabilities, and an increase in non-interest expense primarily related to increases in employee salaries and benefits and marketing relating to our continued expansion of our workforce and markets, and legal and professional costs relating to compliance with the Sarbanes Oxley Act.

     During 2007, management anticipated the downward pressure on interest rates would continue into 2008. As a result, the Bank increased the fixed rate loan portfolio in an attempt to

29

somewhat mitigate the effect of the expected decrease in the rate environment. At December 31, 2007, there was approximately $140 million in loans tied to prime that reprice immediately with a change in the prime rate versus approximately $130 million in loans at December 31, 2006. However, the majority of the more than $80 million increase in total loans during 2007 was fixed rate loans with maturities of approximately three years or less, and loans that reprice less frequently than the daily adjustable rate loans mentioned above. This shift in fixed rate loans will positively impact our results of operations if rates stay at or below current levels and borrowers do not repay these loans in advance of maturity. If, however, rates were to rise above current levels or the levels in place when these loans were made, our results of operations may be negatively impacted.

     The increase in net income in 2006 from 2005 was primarily attributable to a significant increase in net interest income from loans and securities available for sale. The increased net interest income attributable to loans and to securities available for sale resulted from the increase in our loan and securities portfolios and a rising interest rate environment during the first half of 2006. Increased earnings on interest-earning assets exceeded the increased expense from the growth in interest-bearing liabilities, resulting in an improvement in net interest income.

     The increase in our total expenses for 2006 as compared to 2005 was primarily due to an increase in interest expense due to growth in interest bearing liabilities and the rising rate environment during 2006 and an increase in employee salaries and benefits that primarily resulted from expansion of our workforce. The one hundred basis point total increase in the Fed Funds Rate by the FOMC during 2006, which resulted in concomitant increases in the prime-lending rate, contributed to our improved net income during the year. The Bank had approximately $130 million in loans tied to the prime lending rate that re-price with each rate increase. The rising market interest rates during the first half of 2006 positively affected our net interest income because our interest-earning assets re-priced more frequently and more closely tracked changes in market interest rates than did our interest-bearing liabilities. During the second half of 2006, rates paid on interest-earning assets stabilized while rates paid on interest-bearing liabilities continued to increase due to local market competition.

     Basic and diluted earnings per share were $1.68 and $1.61, respectively, for 2007, compared to $1.93 and $1.79, respectively, for 2006, compared to $1.81 and $1.69, respectively, for 2005 reflecting the issuance of 459,742 shares (adjusted for 5% stock dividend) in 2007 in connection with the exercise of warrants we had previously issued and that expired on September 7, 2007 and a 5% stock dividend paid on March 7, 2007. Additionally, the changes in basic and diluted earning per share reflect 90,878 shares issued in 2006 as a result of a 5% stock dividend paid on February 28, 2006. See “Note 14 Stock Options and Warrants” for a more detailed discussion of shares issued.

     The Bank’s net interest margin, the difference between the yields on earning assets, including loan fees, and the rate paid on funds to support those assets, reduced slightly during the first quarter of 2007 then remained relatively steady during the rest of the year. Management’s lending strategy mentioned above that resulted in an increase in fixed rate loans contributed to this stability. Management does not believe this trend of a stable net interest margin will continue during 2008 due to the current market pressures on interest rates. See the section titled “Interest Expense and Net Interest Margin,” below for a more detailed discussion.

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     The Bank’s net interest margin was fairly stable during the first half of 2006, then reduced during the second half of the year. This compression of the net interest margin was due primarily to the continued pressure to increase the rates paid on our interest-bearing liabilities while the rates we earn on our interest earning assets became more stable. This is in contrast to 2005 when we had an increasing net interest margin due to an increasing interest rate environment and our net interest margin increased during the year because our interest-earning assets re-priced more frequently and more closely tracked changes in market interest rates than did our interest-bearing liabilities.

     The following chart illustrates our net income for the periods indicated. The changes below were impacted by changes in rate as well as changes in volume:

	2007		2006		2005
First Quarter	$	901,478	$	935,453	$	640,171
Second Quarter		1,026,037		1,046,081		720,863
Third Quarter		1,006,677		951,271		862,185
Fourth Quarter		977,902		964,568		900,283
Annual Total	$	3,912,094	$	3,897,373	$	3,123,502

     The following discussion and analysis describes, in greater detail, the specific changes in each income statement component.

Net Interest Income

Average Balances, Interest Income, and Interest Expense

     The following table contains condensed average balance sheets for the years indicated. In addition, the amount of our interest income and interest expense for each category of interest-earning assets and interest-bearing liabilities and the related average interest rates, net interest spread and net yield on average interest earning assets are included.

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Average Balance Sheet and Analysis of Net Interest Income
for the Years Ended December 31,
(Dollars in thousands)

	2007							2006							2005
	Average				Rates/			Average				Rates/			Average				Rates/
	Balances		Interest		Yields			Balances		Interest		Yields			Balances		Interest		Yields
Interest-earning assets:
Loans (1)(2)	$	373,237	$	32,267		8.65	%	$	292,950	$	25,287		8.63	%	$	227,910	$	16,545		7.26	%
Investment Securities: (3)
Available for sale		80,168		3,915		4.88	%		69,339		3,281		4.73	%		54,658		2,378		4.35	%
Held to maturity		1,916		92		4.80	%		1,444		68		4.71	%		1,093		54		4.94	%
Equity securities		3,187		186		5.84	%		2,053		128		6.23	%		1,509		72		4.77	%
Total securities		85,271		4,193		4.92	%		72,836		3,477		4.77	%		57,260		2,504		4.37	%
Federal funds sold and other		5,116		254		4.96	%		4,721		237		5.02	%		4,899		175		3.57	%
Total interest-earning assets		463,624		36,714		7.92	%		370,507		29,001		7.83	%		290,069		19,224		6.63	%
Nonearning assets		45,361							37,706							29,806
Total Assets	$	508,985						$	408,213						$	319,875
Interest-bearing liabilities:
Interest bearing deposits:
Interest bearing demand deposits	$	127,704	$	4,949		3.88	%	$	120,268	$	4,477		3.72	%	$	98,356	$	2,142		2.18	%
Savings deposits		8,673		91		1.05	%		7,860		48		0.61	%		6,764		40		0.59	%
Time deposits		196,654		10,032		5.10	%		146,014		6,249		4.28	%		117,415		3,503		2.98	%
Total interest bearing deposits		333,031		15,072		4.53	%		274,142		10,774		3.93	%		222,535		5,685		2.55	%
Securities sold under agreements to repurchase		5,815		158		2.72	%		4,779		102		2.13	%		4,287		64		1.49	%
Federal Home Loan Bank advances and other borrowings		60,970		2,812		4.61	%		31,716		1,493		4.71	%		18,228		650		3.57	%
Subordinated debt		13,403		986		7.36	%		10,181		748		7.35	%		5,671		350		6.17	%
Total interest-bearing liabilities		413,219		19,028		4.60	%		320,818		13,117		4.09	%		250,721		6,749		2.69	%
Noninterest-bearing deposits		53,336		—					54,163		—					46,187		—
Total deposits and interest- bearings liabilities		466,555		19,028		4.08	%		374,981		13,117		3.50	%		296,908		6,749		2.27	%
Other liabilities		2,565							2,066							1,739
Shareholders’ equity		39,865							31,166							21,228
	$	508,985						$	408,213						$	319,875
Net interest income			$	17,686						$	15,884						$	12,475
Net interest spread (4)						3.32	%						3.74	%						3.94	%
Net interest margin (5)						3.81	%						4.29	%						4.30	%

(1)	Interest income from loans includes total fee income of approximately $2,138,000, $2,091,000 and $1,673,000 for the years ended December 31, 2007, 2006 and 2005, 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.

     As mentioned above the increase in net interest income was attributable primarily to an increase in our interest-earning assets. Our investment securities portfolio continued to perform above our peer group average during 2007. As was the case during 2006, the growth of our real estate secured loans in 2007 contributed to the increase in net interest income as the Bank was also able to increase the yield on those loans as compared to the 2006 yield. This increase is attributable to the Bank being more aggressive with its fixed rate lending and overall pricing strategies for loans. The yield on investments continued to increase from 2006 and 2005 levels as well. As can be noted from the increase in the rates paid on deposits, even though 2007 was a

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stable to declining rate environment when FOMC activity is considered, the Bank’s cost of deposits increased for all categories shown in the chart above. As mentioned previously, the local competition for deposits caused interest rates paid on deposits to remain at above market levels during 2007 and we expect this trend to continue in 2008.

     We anticipate that a continued reduction in the target Federal Funds Rate will negatively impact our net interest income during future periods because our interest-earning assets typically re-price more frequently than do our interest-bearing liabilities. There is continued upward pressure on the rates we pay for our deposits due to increased local competition. However, if the target Federal Funds Rate were to increase, net interest income will be positively impacted. The magnitude of the impact from changes in the target Federal Funds Rate, both increases and decreases, has been somewhat reduced due to the increase in fixed rate loan balances. The interest income we earn on loans is the largest contributing component of net interest income and the Bank’s net interest margin.

     During 2006, the increase in net interest income was attributable primarily to an increase in our interest-earning assets. Additionally, our investment securities portfolio continued to perform above our peer group average. Continued strong growth in our loan portfolio, particularly real estate secured loans, contributed to higher average outstanding balances of those interest-earning assets and at higher yields than we paid on interest-bearing deposits and borrowings. See the additional discussion under “Discussion of Financial Condition — Loans.”

     Also contributing to our growth in net interest income during 2006 was the approximately $17,566,000 growth in our portfolio of investment securities, which was funded primarily by the approximately $19.3 million growth in NOW deposit accounts. The increase in income on investment securities was primarily attributable to increases in our average investment securities during 2006, in addition to a 34 basis point increase in the net yield on these average balances from 4.37% in 2005 to 4.77% in 2006. See additional discussion under “Discussion of Financial Condition — Investment Securities.”

Rate and Volume Analysis

     The following table sets forth the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) change in volume (change in volume multiplied by previous year rate); (2) change in rate (change in rate multiplied by current year volume); and a combination of change in rate and change in volume. The changes in interest income and interest expense attributable to both volume and rate have been allocated proportionately to the change due to volume and the change due to rate.

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ANALYSIS OF CHANGES IN NET INTEREST INCOME
FOR THE YEARS ENDED DECEMBER 31,
(Dollars in thousands)

	2007 Compared to 2006
	Increase (decrease)
	due to change in
	Rate			Volume		Total
Income from interest-earning assets:
Interest and fees on loans	$	50		$	6,930	$	6,980
Interest on securities		122			594		716
Interest on Federal funds sold and other		(3	)		20		17
Total interest income		169			7,544		7,713
Expense from interest-bearing liabilities:
Interest on interest-bearing deposits		224			291		515
Interest on time deposits		1,616			2,167		3,783
Interest on other borrowings		(69	)		1,682		1,613
Total interest expense		1,771			4,140		5,911
Net interest income	$	(1,602	)	$	3,404	$	1,802

	2006 Compared to 2005
	Increase (decrease)
	due to change in
	Rate			Volume			Total
Income from interest-earning assets:
Interest and fees on loans	$	4,017		$	4,725		$	8,742
Interest on securities		251			722			973
Interest on Federal funds sold and other		70			(8	)		62
Total interest income		4,338			5,439			9,777
Expense from interest-bearing liabilities:
Interest on interest-bearing deposits		1,868			476			2,344
Interest on time deposits		1,892			852			2,744
Interest on other borrowings		583			697			1,280
Total interest expense		4,343			2,025			6,368
Net interest income	$	(5	)	$	3,414		$	3,409

Provision for Loan Losses

     The provision for loan losses is based on management’s evaluation of economic conditions, volume and composition of the loan portfolio, historical charge-off experience, the level of nonperforming and past due loans, and other indicators derived from reviewing the loan

34

portfolio. Management performs such reviews quarterly and makes appropriate adjustments to the level of the allowance for loan losses as a result of these reviews.

     The increase in the provision for loan losses during 2007 and 2006, as compared to 2005, was based on management’s evaluation of the overall allowance for loan losses relative to management’s assessment of the risk of losses inherent in our loan portfolio. Total loans increased approximately $53 million and $95 million during 2007 and 2006, respectively, as compared to an increase of approximately $40 million during 2005. Management has continued to focus on maintaining our allowance for loan losses at levels that reflect the risk associated with the loan portfolio.

     Management believes that its current credit-granting and administration processes follow a comprehensive and disciplined approach that mitigates risk and lowers the likelihood of significant increases in charge-offs and non-performing loans, although all credit-granting processes require subjective judgments and estimates. For additional information refer to the discussion under “Discussion of Financial Condition — Allowance for Loan Losses.”

Noninterest Income

     The following table presents the major components of noninterest income for 2007, 2006 and 2005 (dollars in thousands).

	Years Ended December 31,						Dollar Change					Percent Change
	2007		2006		2005		2007 to 2006			2006 to 2005		2007 to 2006			2006 to 2005
Service charges on deposit accounts	$	1,414	$	1,293	$	1,142	$	121		$	151		9.36	%		13.22	%
Other fees and commissions		1,153		1,020		891		133			129		13.04	%		14.48	%
Gain on sale of mortgage loans		323		424		401		(101	)		23		-23.82	%		5.74	%
Other noninterest income		852		509		187		343			322		67.39	%		172.19	%
Total noninterest income		3,742		3,246		2,621		496			625		15.28	%		23.85	%

     The principal components of noninterest income during 2005, 2006 and 2007 were service charges on deposits, fees associated with credit/debit cards included in “other fees and commissions”, and income resulting from the increase in the cash surrender value of bank owned life insurance (“BOLI”). The increased income from service charges and the approximately $130,000 and $145,000 increases in credit/debit card income for 2007 and 2006, respectively, were due to the increase in the Bank’s customer base and their continued increased usage of debit and credit cards. The decrease in gain on sale of mortgage loans during 2007 was due to a reduction in staff of the mortgage department and a general downturn in the home sales market in the Sevier and Blount County market areas during the year. The increase in other noninterest income included an increase of approximately $29,000 and $184,000 for 2007 and 2006, respectively, from the cash surrender value of BOLI resulting from the Bank’s investment of approximately $3,950,000 in BOLI from November 2005 to February 2006. Other noninterest income increased approximately $93,000 and $59,000 for 2007 and 2006, respectively, due to the income generated from the Bank’s investment in Appalachian Fund for Growth II, an LLC the Bank invested in during the first quarter of 2006 that invests in low income areas and which generates tax credits for its members like the Company. Also included in other noninterest income during 2007 was a gain on sale of other real estate owned in the amount of $274,000, including a gain of approximately $189,000 discussed in more detail under “Discussion of Financial Condition — Allowance for Loan Losses.”

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Interest Expense and Net Interest Margin

     The increase in interest expense during 2007 as compared to 2006 was due to the general increase in interest rates paid on deposits, primarily demand deposit accounts and time deposits, including brokered deposits, and borrowed funds. The increase in the average balances of time deposits of over $50 million, the increase in Federal Home Loan Bank advances of more than $25 million and the increase in subordinated debt of over $3 million also contributed to the increased interest expense. The interest rates paid on all interest bearing liabilities, with the exception of Federal Home Loan Bank advances, increased during 2007 over rates paid during 2006. As mentioned previously, local competition caused an increase in deposit interest rates during 2007, even though there was no change in the Federal Funds rate prior to September 2007, after which the Federal Funds rate decreased 100 basis points in 2007.

     The increase in interest expense during 2006 as compared to 2005 resulted primarily from an increase in the interest rates we paid on interest-bearing deposits and short-term borrowings during 2006 relative to 2005. Growth in average balances also contributed to the increase. The increase in interest expense on deposits for 2006 was attributable to both the increase of approximately $72 million in the balance of our interest-bearing deposits in 2006 relative to 2005 and to the repricing of our existing interest-bearing deposits to higher rates during 2006.

     The increase in interest expense related to other borrowings for 2006 was primarily due to an increase in the average balance due in other borrowed funds, which resulted primarily from an increase of over $14 million in average Federal Home Loan Bank borrowings. The higher cost of borrowed funds due to the increases in the federal funds overnight rate also impacted interest expense. Additionally, the Company had an increase of over $4 million in the average balance of subordinated debentures. Rising interest rates in 2006 caused the cost of borrowed funds to increase for our subordinated debentures and for the Bank’s Federal Home Loan Bank advances and overnight federal funds purchases. The average balance in other borrowed funds increased by approximately $18 million during 2006, and we used this funding to promote our continued growth.

     Our net interest margin, the difference between the yield on earning assets, including loan fees, and the rate paid on funds to support those assets, averaged 3.81% during 2007 versus 4.29% in 2006, a decrease of 48 basis points. The decrease in our net interest margin reflects a decrease in the average spread in 2007 between the rates we earned on our interest-earning assets, which had an increase in overall yield of 9 basis points to 7.92% at December 31, 2007, as compared to 7.83% at December 31, 2006, and the rates we paid on interest-bearing liabilities, which had an increase in the overall rate of 58 basis points to 4.08% at December 31, 2007, versus 3.50% at December 31, 2006. The stability of the Federal Funds rate from June 2006 through August of 2007 allowed our interest-bearing liabilities to fully reprice to the lower market rates after the rising rate environment during the first half of 2006. As noted from the difference in the increase in our yield we earned on our interest-earning assets as compared to the increase in the rates paid on our interest-bearing liabilities, a 9 basis point increase versus a 58 basis point increase, respectively, the repricing of our liabilities due to market competition created the upward pressure on our interest costs. The cost of borrowed funds did remain relatively stable and were readily available at rates below our local deposit market rates.

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     Our net interest margin averaged 4.29% in 2006 versus 4.30% during 2005, a decrease of one basis point. The decrease in our net interest margin reflects a decrease in the average spread in 2006 between the rates we earned on our interest-earning assets, which had an increase in overall yield of 118 basis points to 7.79% at December 31, 2006, as compared to 6.61% at December 31, 2005 and the rates we paid on interest-bearing liabilities, which had an increase in the overall rate of 140 basis points to 4.09% at December 31, 2006, versus 2.69% at December 31, 2005. The decrease in our net interest margin during 2006, a year in which the Federal Funds rate increased by a total of 100 basis points during the first half of the year then remain unchanged during the last half of the year reflected this trend. Also, the Bank’s increased reliance on borrowed funds and brokered deposits has caused the net interest margin to remain somewhat depressed due to the higher cost of these funds during the short-term period until core deposits increase. Due to the Federal Funds Rate remaining unchanged during the last half of 2006, pressure has been exerted on the Bank to increase the rates paid on interest-bearing liabilities as they reprice. We anticipate in this current period of stable interest rates that the interest rates the Bank pays on interest-bearing liabilities which consist primarily of interest-bearing deposits, will generally increase while the rates the Bank earns on loans, the principal component of the Bank’s interest-earning assets, will remain fairly stable. Consequently, we projected that our net interest margin generally would continue to decrease over the twelve months ending December 31, 2007, due to competitive pricing pressure on our loans and deposits. The continued increase in non-interest-bearing funding sources (capital and demand deposits) relative to interest-bearing liabilities did have a positive effect on net interest margin in 2006.

Noninterest Expenses

     The following table presents the major components of noninterest expense for 2007, 2006 and 2005 (dollars in thousands).

	Years Ended December 31,						Dollar Change				Percent Change
	2007		2006		2005		2007 to 2006		2006 to 2005		2007 to 2006			2006 to 2005
Salaries and employee benefits	$	8,992	$	7,543	$	5,373	$	1,449	$	2,170		19.21	%		40.39	%
Occupancy expenses		1,080		956		852		124		104		12.97	%		12.21	%
Other operating expenses		5,167		4,523		3,903		644		620		14.24	%		15.89	%
Total noninterest expense		15,239		13,022		10,128		2,217		2,894		17.03	%		28.57	%

     The largest component of our non-interest expense, and the greatest contributing factor to the increase in non-interest expense during 2007, was the cost of salaries and employee benefits, which increased by approximately $1,449,000 during 2007. The Bank is continuing to expand operations and construction expenses and personnel costs are expected to increase during the next eighteen to twenty-four months as we complete construction of our branches and operations center currently being built and expand to staff our new facilities and expand our support staff. The number of full-time equivalent employees increased from 150 at December 31, 2006, to 173 at December 31, 2007. The increase in other operating expenses during 2007 was primarily attributable to increases in marketing expense, professional fees and FDIC assessments of approximately $113,000, $101,000 and $107,000, respectively. Marketing expense increased due to our expansion into the Blount County market. Professional fees increased due to our compliance with Sarbanes Oxley. FDIC assessment expense increased due to FDIC deposit

37

insurance premiums paid during 2007 as discussed in more detail above in “Supervision and Regulation — FDIC Insurance Assessments.”

     The largest component of our non-interest expense, and the greatest contributing factor to the increase in non-interest expense during 2006, was the cost of salaries and employee benefits, which increased by approximately $2,170,000 during 2006. The increase in salaries and employee benefits included normal increases in salaries, group insurance, payroll taxes, profit sharing and employee incentives along with increases directly related to an increased number of employees. The number of full-time equivalent employees increased from 131 at December 31, 2005, to 150 at December 31, 2006. Combined equipment and occupancy expenses increased from $1,611,099 during 2005 to $1,916,184 in 2006 due to our increase in staff and the opening of our branch office in Blount County.

Income Taxes

     Our provision for income taxes and effective tax rates for 2007, 2006 and 2005 were as follows:

     Provision for Income Taxes and Effective Tax Rates

(dollars in thousands)	Provision		Effective Tax Rates
2007	$	1,294		24.86	%
2006		1,295		24.95	%
2005		1,454		31.76	%

     The Bank’s effective tax rate during 2006 and 2007 was virtually unchanged. The decrease in the effective tax rate from 2005 to 2006 and 2007 is due primarily to the tax benefits generated from the formation of MNB Real Estate, Inc., which is a real estate investment trust subsidiary formed during the second quarter of 2005. Additionally, during 2006 the Bank became a partner in Appalachian Fund for Growth II, LLC with three other Tennessee banking institutions. This partnership invested in a program that generated a federal tax credit in the amount of approximately $200,000 per year during 2006 and 2007. Additionally, the partnership generated a single $200,000 State of Tennessee tax credit for tax year 2006. Tax-exempt income generated from municipal bonds and bank owned life insurance also contributed to the lower effective tax rates in 2006 and 2007.

Discussion of Financial Condition

General Discussion of Our Financial Condition

     The following is a summary comparison of selected major components of our financial condition for the periods ended December 31, 2007 and 2006 (dollars in thousands):

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	2007			2006			$ change			% change
Cash and equivalents	$	16,329		$	13,396		$	2,933			21.89	%
Loans		397,674			344,709			52,965			15.37	%
Allowance for loan losses		3,974			3,524			450			12.77	%
Investment securities		82,987			75,994			6,993			9.20	%
Premises and equipment		25,427			19,944			5,483			27.49	%
Total assets		541,496			469,982			71,514			15.22	%
Noninterest-bearing demand deposits		56,307			60,016			(3,709	)		-6.18	%
Interest-bearing demand and savings deposits		139,319			130,011			9,308			7.16	%
Time deposits		208,748			171,702			37,046			21.58	%
Total deposits		404,374			361,729			42,645			11.79	%
Federal funds purchased		1,300			15,575			(14,275	)		-91.65	%
Federal Home Loan Bank advances		65,356			36,710			28,646			78.03	%
Subordinated debentures		13,403			13,403			—			0.00	%
Total liabilities		492,548			435,571			56,977			13.08	%
Accumulated other comprehensive income (loss)		(279	)		(698	)		419			-60.03	%
Total shareholders’ equity	$	48,948		$	34,411		$	14,537			42.25	%

Loans

     At December 31, 2006 and 2007, loans comprised 80.3% and 80.8% of our total earning assets, respectively. The increase in our loan portfolio was primarily attributable to strong growth in real estate loans, including construction, commercial and residential real estate loans. Total earning assets as a percent of total assets, were 90.8% at December 31, 2007, compared to 91.3% at December 31, 2006. This decrease in total earning assets relative to total assets in 2007 was attributable to the increase in premises and equipment related to expansion and the construction of new branches and the expansion of our operations center.

     Loan Portfolio. Our loan portfolio consisted of the following loan categories and amounts as of the dates indicated:

	At December 31,
	2007		2006		2005		2004		2003
	(In Thousands)
Commercial, financial, agricultural	$	35,929	$	26,062	$	15,375	$	9,870	$	10,489
Real estate — construction, development		150,844		137,989		80,719		55,618		44,086
Real estate — mortgage		201,011		173,085		144,898		134,272		119,821
Consumer and other		9,890		7,572		7,872		9,418		5,449
Less allowance for loan losses		3,974		3,524		2,634		2,281		2,142
Loans, net	$	393,700	$	341,184	$	246,230	$	206,897	$	177,703

     Commercial and consumer loans tend to be more risky than loans that are secured by real estate, however, the Bank seeks to control this risk with strict adherence to quality underwriting standards.

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     Maturities and Sensitivities of Loan Portfolio to Changes in Interest Rates. Total loans as of December 31, 2007 are classified in the following table according to maturity or scheduled repricing:

	One year		Over one year		Over three years		Over five
	or less		through three years		through five years		years
	(Dollars in Thousands)
Commercial, financial, agricultural	$	23,320	$	6,576	$	3,501	$	2,533
Real estate — construction, development		123,865		23,751		1,970		1,252
Real estate — mortgage		104,970		50,510		30,037		15,498
Consumer and other		6,604		1,994		1,040		253
Total	$	258,759	$	82,831	$	36,548	$	19,536

     Of our loans maturing more than one year after December 31, 2007, approximately $62,026,000 had fixed rates of interest and approximately $76,889,000 had variable rates of interest. At December 31, 2007, loans to sub-dividers/developers were 14.19% of total loans. No other concentrations of credit exceeded ten percent of our total loans.

Allowance for Loan Losses

     The allowance for loan losses represents management’s assessment and estimates of the risks associated with extending credit and its evaluation of the quality of our loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain the allowance for loan losses at a level believed to be adequate to absorb anticipated loan losses. In assessing the adequacy of the allowance, management reviews the size, quality and risk of loans in the portfolio. Management also considers such factors as the Bank’s loan loss experience, the amount of past due and nonperforming loans, impairment of loans, specific known risks, the status and amount of nonperforming assets (including loans), underlying collateral values securing loans, current and anticipated economic conditions and other factors which affect the allowance for credit losses. The Bank’s loan review officer, on a quarterly basis, prepares an analysis of the credit quality of the loan portfolio and the adequacy of the allowance for loan losses for review by our board of directors.

     Our allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the level of risk in the loan portfolio. During their routine examinations of banks, regulatory agencies may advise the bank to make additional provisions to its allowance for loan losses when the opinion of the regulators regarding credit evaluations and allowance for loan loss methodology differ materially from those of the bank’s management.

     Concentrations of credit risk typically involve loans to one borrower, an affiliated group of borrowers, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose loans are secured by the same type of collateral. Our most significant concentration of credit

40

risks lies in the high proportion of our loans to businesses and individuals dependent on the tourism industry. The Bank assesses loan risk by primary concentrations of credit by industry and loans directly related to the tourism industry are monitored carefully. At December 31, 2007, approximately $179 million in loans, or 45% of total loans, were to businesses and individuals whose ability to repay depends to a significant extent on the tourism industry in the markets we serve as compared to approximately $121 million in loans, or 35% of total loans, at December 31, 2006. The most significant increase in this category was for sub-dividers/developers which increased approximately $19 million to approximately $58 million, followed by hotel & motel franchise operators with an increase of approximately $15 million to approximately $30 million.

     While it is the Bank’s policy to charge off in the current period loans for which a loss is considered confirmed, there are additional risks of losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because the risk of loss includes unpredictable factors, such as the state of the economy and conditions affecting individual borrowers, management’s judgments regarding the appropriate size of the allowance for loan losses is necessarily approximate and imprecise, and involves numerous estimates and judgments that may result in an allowance that is insufficient to absorb all incurred loan losses.

     Management considered asset quality to be very good as of December 31, 2007. Non-accrual loans as a percentage of total loans increased from 0.00% at December 31, 2006 to 0.04% at December 31, 2007 while the ratio of nonperforming assets to total loans decreased from 0.14% at December 31, 2006 to 0.05% at December 31, 2007. Our allowance for loan losses at December 31, 2007, was approximately $3,974,000, a net increase of approximately $450,000 for the year. As a result of our improved asset quality during 2007, the allowance for loan losses as a percentage of total loans, non-accrual loans and non-performing assets at December 31, 2007 was 1.00%, 2,225.54% and 1,966.63%, respectively, compared to 1.02%, N/A ($0 non-accrual loan balance) and 749.61%, respectively, at December 31, 2006. Net charge-offs during 2007 increased from approximately $25,000 in 2006 to approximately $532,000 in 2007, representing a net charge-off ratio of 0.15% in 2007 compared to 0.01% in 2006. Management continues to evaluate and adjust our allowance for loan losses, and presently believes the allowance for loan losses is adequate to provide for potential losses in the loan portfolio.

     The recent turmoil in the credit markets caused by problems due to sub-prime loans has had very little direct impact on the Bank. The Bank does not originate sub-prime loans or purchase investments that contain sub-prime loans. The increase in net charge-offs during 2007 mentioned above included a charge-off of a loan in the amount of $250,000 during October 2007. The sale of the property approximately thirty days later resulted in a gain on the sale of Other Real Estate Owned in the amount of approximately $189,000, or a net loss on this property of approximately $61,000. The original charge off of $250,000 was appropriate based on information management had concerning the property prior to taking possession, but management under estimated the strong demand in Sevier County for the property. This loan is in the Real Estate — mortgage line in the table that summarizes our loan loss experience and related adjustments to the allowance for loan and lease losses below.

     The following table sets forth, as of the dates indicated, the aggregate value of non-performing loans for the following categories:

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	At December 31,
	2007		2006		2005		2004		2003
	(Dollars in Thousands)
Loans accounted for on a nonaccrual basis	$	179	$	—	$	92	$	161	$	289
Loans contractually past due ninety days or more as to interest or principal payments and still accruing		19		470		342		21		1,460
Loans, the terms of which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower		—		—		—		—		—
Loans now current about which there are serious doubts as to the ability of the borrower to comply with present loan repayment terms		170		30		95		15		182

     Management is not aware of any loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been identified which (1) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (2) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

     The following table sets forth the reduction in interest income we experienced in 2006 and 2007 as a result of non-performance of certain loans during the year:

	2007		2006
Interest income that would have been recorded on nonaccrual loans under original terms	$	7,006	$	458
Interest income that was recorded on nonaccrual loans		41,397		458

     The purpose of placing a loan on non-accrual is to prevent the Bank from overstating its income. The decision to place a loan on non-accrual is made by the Executive Committee based on a monthly review. The Executive Committee also reviews any loans recommended by management to be placed on non-accrual that are: (1) being maintained on a cash basis because of deterioration in the financial position of the borrower; or (2) for which payment in full of interest or principal is not expected.

     Generally, the Bank does not accrue interest on any loan when principal or interest are in default for 90 days or more unless the loan is well secured and in the process of collection. Consumer loans and residential real estate loans secured by 1-4 family dwellings are ordinarily not subject to those guidelines.

     The Board of Directors may restore a non-accruing loan to an accruing status when principal and interest is no longer due and unpaid, or it otherwise becomes both well secured and in the process of collection. All loans on non-accrual are reported on the Bank’s watch loan list.

     The following table summarizes our loan loss experience and related adjustments to the allowance for loan losses as of the dates and for the periods indicated:

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	December 31,
	2007			2006			2005			2004			2003
	(Dollars in Thousands)
Average balance of loans outstanding	$	373,237		$	292,950		$	227,910		$	188,481		$	162,133
Balance of allowance for loan losses at beginning of year		3,524			2,634			2,281			2,142			1,595
Charge-offs:
Commercial, financial, agricultural		43			—			—			—			10
Real estate — construction, development		158			1			24			—			3
Real estate — mortgage		250			25			40			325			7
Consumer and other		110			23			45			42			187
Recoveries:
Commercial, financial, agricultural		—			—			—			—			10
Real estate — construction, development		—			1			—			17			4
Real estate — mortgage		15			18			10			21			—
Consumer and other		14			5			6			—			5
Net charge-offs		532			25			93			329			188
Additions to allowance charged to operations		982			915			446			468			735
Balance of allowance for loan losses at end of year		3,974			3,524			2,634			2,281			2,142
Ratio of net loan charge-offs during the year to average loans outstanding during the year		0.14	%		0.01	%		0.04	%		0.17	%		0.12	%

     The following table presents our allocation of the allowance for loan losses to the categories of loans in our loan portfolio as of the dates indicated:

	December 31,
	2007					2006					2005					2004					2003
			Loan					Loan					Loan					Loan					Loan
			Category as					Category as					Category as					Category as					Category as
			% of Total					% of Total					% of Total					% of Total					% of Total
	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans
											(Dollars in Thousands)
Commercial	$	968		9.03	%	$	418		7.56	%	$	225		3.16	%	$	226		4.72	%	$	261		5.83	%
Real estate — construction, development	$	1,600		37.93	%	$	1,331		40.03	%	$	837		32.43	%	$	584		26.59	%	$	495		24.51	%
Real estate — mortgage		1,201		50.55	%		1,669		50.21	%		1,502		58.23	%		1,411		64.19	%		1,347		66.63	%
Consumer, other		205		2.49	%		106		2.20	%		70		6.18	%		60		4.50	%		39		3.03	%
Total	$	3,974		100.00	%	$	3,524		100.00	%	$	2,634		100.00	%	$	2,281		100.00	%	$	2,142		100.00	%

Securities

     Our investment securities portfolio consists of securities of U.S. government agencies, mortgage-backed securities and municipal securities. The investment securities portfolio is the second largest component of our earning assets and represented 16.87% of total earning assets and 15.33% of total assets at year-end 2007. As an integral component of our asset/liability management strategy, we manage our investment securities portfolio to maintain liquidity, balance interest rate risk and augment interest income. We also use our investment securities portfolio to meet pledging requirements for deposits and borrowings. The average yield on our investment securities portfolio during 2007 was 4.92% versus 4.77% for 2006, an increase of 15 basis points. Net unrealized losses on securities available for sale, included in accumulated other comprehensive income/(loss), decreased by $418,747, net of income taxes, during 2007.

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     The growth in our investment securities portfolio during 2007 was attributable to deposit inflows of public funds that are required to be collateralized with these investments that we invested in U.S. government securities. The average yields on these investments generally exceeded the cost of the interest-bearing deposits and borrowings that funded them during 2007. Included in our investment securities portfolio as of December 31, 2007, was approximately $15,855,000 in tax-exempt municipal securities.

     The carrying amounts of securities at the dates indicated are summarized as follows:

	December 31,
	2007		2006		2005
	(Dollars in Thousands)
Securities available for sale:
U.S. Treasury and government agencies and corporations	$	9,179	$	9,535	$	6,502
Mortgage-backed securities		57,975		51,367		40,851
Obligations of states and political subdivisions		13,812		13,612		9,663
Total		80,966		74,514		57,016
Securities held to maturity:
Obligations of states and political subdivisions		2,021		1,480		1,411

     The following table contains the contractual maturity distribution, carrying value, and weighted-average yield to maturity of our investment securities.

	Maturity
			Weighted			After 1		Weighted			After 5		Weighted					Weighted					Weighted
	1 year		Average			Year - 5		Average			Years - 10		Average			Over 10		Average					Average
	or less		Yield			5 Years		Yield			Years		Yield			Years		Yield			Total		Yield
											(dollars in thousands)
Available for Sale:
U.S. Treasury and Government Agencies	$	250		4.32	%		2,503	$	5.37	%	$	2,428		4.69	%	$	3,998		5.06	%	$	9,179		5.03	%
Mortgage-Backed Securities		—		—			—		—			11,551		5.37	%		46,424		5.09	%		57,975		5.14	%
Obligations of State and Political Subdivisions		311		4.58	%		1,421		4.81	%		3,700		5.94	%		8,380		5.69	%		13,812		5.64	%
Total Available for Sale		561		4.46	%		3,924		5.17	%		17,679		5.40	%		58,802		5.17	%		80,966		5.22	%
Held to Maturity:
U.S. Treasury and Government Agencies		—		—			—		—			—		—			—		—			—		—
Mortgage-Backed Securities		—		—			—		—			—		—			—		—			—		—
Obligations of State and Political Subdivisions		—		—			—		—			—		—			2,021		8.95	%		2,021		8.95	%
Total Held to Maturity		—		0.00	%		—		0.00	%		—		0.00	%		2,021		8.95	%		2,021		8.95	%
Total Securities		561		4.46	%		3,924		5.17	%		17,679		5.40	%		60,823		5.30	%		82,987		5.31	%

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     We did not hold any securities from a single issuer that exceeded 10% of total shareholders’ equity as of December 31, 2007, except for securities of the U.S. Government or U.S. Government agencies and except for mortgage-backed securities issued by government sponsored entities that had a carrying value of approximately $57,975,000 and $51,368,000 at December 31, 2007 and 2006, respectively.

Deposits

     Asset growth during 2007 was funded primarily by the increase in deposits and FHLB advances for the periods ended December 31, 2007 and 2006.

     The balances in total deposits was distributed as follows:

	2007		2006		$ change			% change
Noninterest-bearing demand deposits	$	56,307	$	60,016	$	(3,709	)		-6.18	%
Total noninterest-bearing deposits		56,307		60,016		(3,709	)		-6.18	%
NOW Accounts		87,380		76,070		11,310			14.87	%
Money market accounts		42,959		45,667		(2,708	)		-5.93	%
Savings		8,980		8,275		705			8.52	%
Brokered Deposits		48,210		51,379		(3,169	)		-6.17	%
Time deposits		160,538		120,322		40,216			33.42	%
Total interest-bearing deposits		348,067		301,713		46,354			15.36	%
Total deposits	$	404,374	$	361,729	$	42,645			11.79	%

     Brokered deposits are certificates of deposit acquired from approved brokers on terms that are substantially similar to deposits acquired in the local market. Brokered deposits decreased approximately $3 million at December 31, 2007 as compared to December 31, 2006. The Bank will continue to rely upon these brokered deposits going forward due to the increasing loan demand, the relative ease at which these deposits can be acquired and replaced upon maturity and their comparability to local market rates. The average cost of our brokered deposits at December 31, 2007 was 5.03%. During 2008, maturing brokered deposits are being replaced at an average rate of 3.50%, a 153 basis point decrease over the 2007 average, with maturities ranging from 12 to 24 months.

     The average balances of deposit accounts by category and the average rates paid thereon are presented below for the periods indicated:

	2007					2006					2005
	Amount		Rate			Amount		Rate			Amount		Rate
	(Dollars in Thousands)
Non-interest-bearing demand deposits	$	53,336		0	%	$	54,163		0	%	$	46,187		0	%
Interest-bearing demand deposits		127,704		3.88	%		120,268		3.72	%		98,356		2.18	%
Savings deposits		8,673		1.05	%		7,860		0.61	%		6,764		0.59	%
Time deposits		196,654		5.10	%		146,014		4.28	%		117,415		2.98	%
Total	$	386,367				$	328,305				$	268,722

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     The balances in time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2007, are shown below by time remaining until maturity:

	(Dollars in
	Thousands)
Three months or less	$	43,130
Over three months through six months		33,442
Over six months through 12 months		28,672
Over 12 months		31,894
Total	$	137,138

     The average balance of interest-bearing demand and savings deposits increased approximately $8,249,000 during 2007. The average rate paid on these interest-bearing demand and savings deposits in 2007 was 3.70% up from 3.53% in 2006.

     We also continue to experience high demand for our certificate of deposit accounts. We offer certificate of deposit accounts on a wide range of terms in order to achieve sustained growth in a market area where there is strong competition for new deposits. Our total average cost of interest-bearing deposits (including demand, savings and certificate of deposit accounts) for 2007 was 4.53%, up from 3.93% in the prior year.

Shareholders’ Equity

     The increase in shareholders’ equity was primarily the result of the exercise of stock options and warrants, as discussed in more detail under “Item 1 — Business,” as well as the increase in net earnings of approximately $3,912,000. Accumulated other comprehensive loss, which represents the net unrealized losses on securities available-for-sale, decreased approximately $419,000 during 2007 to approximately $279,000.

Interest Rate Sensitivity Management

     Interest rate risk is the risk to earnings or market value of equity from the potential movement in interest rates. The primary purpose of managing interest rate risk is to reduce the effects of interest rate volatility and achieve reasonable stability of earnings from changes in interest rates and preserve the value of our equity. Changes in interest rates affect, among other things, our net interest income, volume of loan production and the fair value of financial instruments and our loan portfolio. A key component of our interest rate risk management policy is the maintenance of an appropriate mix of assets and liabilities.

     It is our objective to manage assets and liabilities to control the impact of interest rate fluctuations on earnings and to provide a satisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing, and capital policies. Certain officers within the Bank are charged with the responsibility for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix.

     The Bank’s asset/liability mix is monitored on a regular basis and a report reflecting the interest rate sensitive assets and interest rate sensitive liabilities is prepared and presented to our Board of Directors and management’s asset/liability committee on a quarterly basis. The key

46

objective of our asset/liability management policy is to monitor and adjust the mix of interest rate sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on earnings by matching rates and maturities of our interest-earning assets to those of our interest-bearing liabilities. An asset or liability is considered to be interest rate-sensitive if it will reprice or mature within the time period analyzed, usually one year or less.

     We use interest rate sensitivity gap analysis to achieve the appropriate mix of interest rate-sensitive assets and liabilities. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within a given time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If our assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.

     A simple interest rate “gap” analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, we also evaluate how the repayment of particular assets and liabilities is impacted by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, unpredictable variables such as the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps”), that limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap.

     The following table summarizes our interest-sensitive assets and liabilities as of December 31, 2007. Adjustable rate loans are included in the period in which their interest rates are scheduled to adjust. Fixed rate loans are included in the periods in which they are anticipated to be repaid based on scheduled maturities and anticipated prepayments. Investment securities are included in the period in which they are scheduled to mature while mortgage backed securities are included according to expected repayment. Certificates of deposit are presented according to contractual maturity dates.

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Analysis of Interest Sensitivity
As of December 31, 2007
(Dollars in Thousands)

	0 — 3			3 — 12			1 — 3			Over 3
	Months			Months			Years			Years			Total
Federal funds sold	$	3,317		$	0		$	0		$	0		$	3,317
Securities		2,876			8,108			20,821			51,182			82,987
Loans (1)		205,414			70,177			77,463			44,620			397,674
Total interest-earning assets	$	211,607		$	78,285		$	98,284		$	95,802		$	483,978
Interest-bearing liabilities:
Interest-bearing demand deposits		130,339			0			0			0			130,339
Savings		8,980			0			0			0			8,980
Time deposits		59,772			107,446			31,227			10,303			208,748
Other borrowings		6,742			7,456			7,700			50,200			72,098
Total interest-bearing liabilities	$	200,391		$	114,902		$	38,927		$	60,503		$	414,723
Interest rate sensitivity gap	$	11,216		$	(36,617	)	$	59,357		$	35,299		$	69,255
Cumulative interest rate sensitivity gap	$	11,216		$	(25,401	)	$	33,956		$	69,255
Interest rate sensitivity gap ratio		5.30	%		(46.77	%)		60.39	%		36.85	%
Cumulative interest rate sensitivity gap ratio		5.30	%		(8.76	%)		8.75	%		14.31	%

(1) Includes nonaccrual loans.

     In the last four months of 2007 the Federal Reserve reduced the targeted federal funds rate three times, for a total of 1.00% and reduced the discount rate four times during the last five months of 2007, for a total of 1.50%.

     At December 31, 2007, the Bank’s cumulative one-year interest rate sensitivity gap ratio was (8.76%), which would tend to indicate that our interest-earning assets will re-price during this period at a rate slower than our interest-bearing liabilities. However, in our experience, not all liabilities shown in our gap analysis as being subject to repricing during a given period will in fact experience significant repricing even as market rates change. For example, we have a base of core deposits consisting of interest-bearing checking accounts, money market accounts and passbook savings accounts whose average balances and interest rates paid generally fluctuate very little with changes in the levels of market interest rates. Consequently, these relatively static interest-bearing liabilities, while sensitive to market interest rates and therefore included in our interest rate sensitivity gap analysis, tend to have a much greater effect on our gap analysis than they do on our actual net interest margin. More than $61 million of the deposits reflected in the table above as repricing within the first three months of 2008 fall into this category of interest-bearing liabilities that have low interest rate variability relative to changes in market rates of interest. Because the effects of these categories of interest-bearing liabilities tends to be overstated in our gap analysis, we believe that the spread between our interest-earning assets and interest-bearing liabilities will not be affected as much by the repricing period for these deposits as they will by the current interest rate environment. Generally, the interest rates we are required

48

to pay on these interest-bearing deposit accounts will not decrease at the same rate as the interest rates we earn on loans.

Return on Assets and Equity

     The following table summarizes our return on average assets and return on average equity as well as our dividend payout ratio for the years ended December 31, 2007, 2006 and 2005:

	For the Years Ended
	December 31,
	2007			2006			2005
Return on Average Assets		0.77	%		0.95	%		0.98	%
Return on Average Equity		9.81	%		11.26	%		16.87	%
Average Equity as a Percentage of Average Assets		7.83	%		8.48	%		5.79	%
Dividend Payout Ratio		0.00	%		0.00	%		0.00	%

Capital Adequacy and Liquidity

     Our funding sources primarily include customer-based core deposits and customer repurchase accounts. The Bank, being situated in a market that relies on tourism as its principal industry, can be subject to periods of reduced deposit funding because tourism in Sevier County is seasonably slow in the winter months. The Bank manages seasonal deposit outflows through its secured Federal Funds lines of credit at several correspondent banks. Those lines totaled $39 million as of December 31, 2007, and are available on one day’s notice. The Bank also has a cash management line of credit in the amount of $100 million from the FHLB of Cincinnati that the Bank uses to meet short-term liquidity demands.

     Capital adequacy is important to the continued financial safety and soundness and growth of the Bank and the Company. Our banking regulators have adopted risk-based capital and leverage guidelines to measure the capital adequacy of national banks and bank holding companies. Based on these guidelines, management believes the Bank and the Company are “well capitalized.”

Regulatory Capital Requirements

     The Bank is subject to minimum capital standards as set forth by federal bank regulatory agencies.

     The Bank’s capital for regulatory purposes differs from the Bank’s equity as determined under generally accepted accounting principles. Generally, “Tier 1” regulatory capital will equal capital as determined under generally accepted accounting principles less any unrealized gains or losses on securities available for sale, while “Tier 2” capital includes the allowance for loan losses up to certain limitations. Total risk based capital is the sum of Tier 1 and Tier 2 capital.

49

     Total capital at the Bank also has an important effect on the amount of FDIC insurance premiums paid. Institutions not considered well capitalized are subject to higher rates for FDIC insurance.

The table below sets forth the Bank’s capital ratios as of the periods indicated:

	December 31, 2007			December 31, 2006
Tier 1 Risk-Based Capital		13.10	%		11.33	%
Regulatory Minimum		4.00			4.00
Well-capitalized		6.00			6.00
Total Risk-Based Capital		13.97	%		12.22	%
Regulatory Minimum		8.00			8.00
Well-capitalized		10.00			10.00
Tier 1 Leverage		11.24	%		9.99	%
Regulatory Minimum		4.00			4.00
Well-capitalized		5.00			5.00

     In November 2003, the Company formed a wholly owned Delaware statutory trust subsidiary, MNB Capital Trust I. This subsidiary issued approximately $5.5 million in trust preferred securities, guaranteed by the Company on a junior subordinated basis. In June 2006, the Company formed a wholly owned Delaware statutory trust subsidiary, MNB Capital Trust II. This subsidiary issued approximately $7.5 million in trust preferred securities, guaranteed by the Company on a junior subordinated basis. The Company obtained the proceeds from the trusts’ sale of trust preferred securities by issuing junior subordinated debentures to the trusts. Under the Financial Accounting Standards Board’s revised Interpretation No. 46 (“FIN 46R”), the trust subsidiaries must be deconsolidated with the Company for accounting purposes. As a result of this accounting pronouncement, the Federal Reserve Board adopted changes to its capital rules with respect to the regulatory capital treatment afforded to trust preferred securities. The Federal Reserve Board’s current rules permit qualified trust preferred securities and other restricted capital elements to be included as Tier 1 capital up to 25% of core capital, net of goodwill and intangibles. The Company believes that its trust preferred securities qualify under these revised regulatory capital rules and expects that it will continue to treat the eligible portion of its $13 million of trust preferred securities as Tier 1 capital.

     The Company’s sale of 416,500 shares of common stock during the third quarter of 2005 resulted in an increase in capital of approximately $9,896,500. In connection with the offering, there were 416,500 warrants issued, one warrant for each share of stock sold, that had an exercise price of $25.20 per warrant. The warrants could be exercised beginning after one year from the date of the sale of the common stock, and had to be exercised no later than two years from the date of the sale. The final day to exercise the common stock warrants was September 7, 2007. During their one year outstanding, 476,194 out of 482,151 (adjusted for 5% stock dividends) warrants were exercised at a weighted average exercise price of $21.77 (adjusted for 5% stock dividends). The total corresponding increase to shareholders’ equity from September 30, 2006 to September 30, 2007, was approximately $10,367,000. The increase in shareholder’s

50

equity should keep both the Company and the Bank well-capitalized under regulatory standards and allow for future growth for approximately three to five years.

     Liquidity is the ability of a company to convert assets into cash or cash equivalents without significant loss. Our liquidity management involves maintaining our ability to meet the day-to-day cash flow requirements of our customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, we would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the production and growth needs of the communities we serve.

     The primary function of asset and liability management is not only to assure adequate liquidity in order for us to meet the needs of our customer base, but also to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so that we can also meet the investment objectives of our shareholders. For additional information relating to our interest rate sensitivity management, refer to the discussion above under the heading “Interest Rate Sensitivity Management.” Daily monitoring of the sources and uses of funds is necessary to maintain an acceptable cash position that meets both the needs of our customers and the objectives of our shareholders. In a banking environment, both assets and liabilities are considered sources of liquidity funding and both are therefore monitored on a daily basis.

Off-Balance Sheet Arrangements

     Our only material off-balance sheet arrangements consist of commitments to extend credit and standby letters of credit issued in the ordinary course of business to facilitate customers’ funding needs or risk management objectives.

Commitments and Lines of Credit

     In the ordinary course of business, the Bank has granted commitments to extend credit and standby letters of credit to approved customers. Generally, these commitments to extend credit have been granted on a temporary basis for seasonal or inventory requirements and have been approved by the Bank’s loan committee. These commitments are recorded in the financial statements as they are funded. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The following is a summary of the Bank’s commitments outstanding at December 31, 2007 and 2006.

	2007		2006
	(Dollars in thousands)
Commitments to extend credit	$	125,475	$	110,963
Standby letters of credit		5,824		12,250
Totals	$	131,299	$	123,213

     Commitments to extend credit include unused commitments for open-end lines secured by 1-4 family residential properties, commitments to fund loans secured by commercial real estate, construction loans, land development loans, and other unused commitments.

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Commitments to fund commercial real estate, construction, and land development loans increased approximately $6,939,000 during 2007. This increase in commitments from 2006 to 2007 was due to the continued increase in the development of property in Sevier County, and our success in attracting new customers.

Effects of Inflation

     Our consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operational results in terms of historic dollars, without considering changes in the relative purchasing power of money over time due to inflation.

     Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects financial institutions’ cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and stockholders’ equity. Mortgage originations and refinancings tend to slow as interest rates increase, and likely will reduce the Bank’s volume of such activities and the income from the sale of residential mortgage loans in the secondary market.

Significant Accounting Changes

     In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.” (“SFAS 155”) SFAS 155 permits, but does not require, fair value accounting for hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” (“SFAS 133”) SFAS 155 also eliminated the temporary exemption for interests in securitized financial assets provided for by SFAS 133, Derivatives Implementation Group (“DIG”) Issue D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” The FASB issued interpretive guidance in SFAS 133 during January 2007, DIG Issue B40, “Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets,” in which the FASB concluded that a securitized interest in prepayable financial assets was not subject to the bifurcation requirements of SFAS 155 when the interest met both of the following criteria: (1) the right to accelerate the settlement of the securitized interest cannot be controlled by the investor; and (2) the securitized interest itself does not contain an embedded derivative for which bifurcation would be required other than embedded derivative that results solely from the embedded call options in the underlying financial assets. SFAS 155 is effective for all financial instruments acquired or issued after December 31, 2006 as well as to those hybrid financial instruments that had been previously bifurcated under SFAS 133. The guidance in DIG Issue B40 is effective upon the adoption of SFAS 155. As of December 31, 2007, the Company did not have any hybrid financial instruments that were previously bifurcated under SFAS 133 and the guidance provided for in DIG Issue B40 allowed the Company to continue to purchase mortgage-backed securities without applying the bifurcation requirements of SFAS 155. The

52

adoption of SFAS 155 and DIG Issue B40 did not have a material impact on the Company’s financial statements.

     In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material.

     In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

     The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. 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. The adoption had no effect on the Company’s financial statements.

     In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The impact of adoption was not material.

     In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance) (“EITF 06-5”). This Issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue requires disclosure when there are contractual restrictions on the Company’s ability to surrender a policy. The adoption of EITF

53

06-5 on January 1, 2007 had no impact on the Company’s financial condition or results of operation.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of the Company, including notes thereto, and the reports of the Company’s independent registered public accounting firm are included in this Annual Report on Form 10-K beginning at page F-1 and are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports and other information filed with the Commission, under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to the management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

     The Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

     During the fourth quarter of 2007 there were no changes in the Company’s internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

     Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting. Internal control is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation of reliable published financial statements. Internal control over financial reporting includes self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

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     Because of inherent limitations in any system of internal control, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time.

     Management assessed the Company’s internal control over financial reporting as of December 31, 2007. This assessment was based on criteria for effective internal control over financial reporting described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Chief Executive Officer and Chief Financial Officer concluded that the Company maintained effective internal control over financial reporting as of December 31, 2007 based on the specified criteria.

     This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     The information appearing under the headings “Proposal #1 Election of Directors,” “Additional Information Concerning the Company’s Board of Directors and Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement (the “2008 Proxy Statement”) relating to the annual meeting of shareholders of the Company, scheduled to be held on May 6, 2008, is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

     The information appearing under the heading “Proposal #1 Election of Directors” and “Compensation of Named Executive Officers and Directors” in the 2008 Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The information appearing under the heading “Outstanding Voting Securities of the Company and Principal Holders Thereof” in the 2008 Proxy Statement is incorporated herein by reference.

55

     The information appearing under “Note 14. Stock Options and Warrants” in the 2007 notes to the financial statements is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     The information appearing under the headings “Certain Relationships and Transactions” and “Proposal #1 Election of Directors” in the 2008 Proxy Statement is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information appearing under the caption “Proposal #2 — Ratification of Independent Registered Public Accounting Firm” in the 2008 Proxy Statement is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS

     (a) The following exhibits are filed as a part of or incorporated by reference in this report:

Exhibit No.	Description of Exhibit
2.1	Plan of Reorganization dated March 28, 2003, by and between the Registrant and Mountain National Bank (included as Exhibit 2.1 to the Report on Form 8-K12G3 of the Registrant, dated July 12, 2003 (File No. 000-49912), previously filed with the Commission and incorporated herein by reference).
2.2	Amendment to Plan of Reorganization dated July 1, 2003 (included as Exhibit 2.2 to the Report on Form 8-K12G3 of the Registrant, dated July 12, 2003 (File No. 000-49912), previously filed with the Commission and incorporated herein by reference).
3.1	Charter of Incorporation of the Registrant, as amended (included as Exhibit 3.1 to the Report on Form 8-K of the Registrant, dated May 19, 2006 (File No. 000-49912), previously filed with the Commission and incorporated herein by reference).
3.2	Bylaws of the Registrant, as amended (included as Exhibit 3.2 to the Report on Form 8-K of the Registrant, dated May 19, 2006 (File No. 000-49912), previously filed with the Commission and incorporated herein by reference).
10.1	Stock Option Plan of the Registrant, as amended (included as Exhibit 10.1 to the Report on Form 8-K of the Registrant, dated May 19, 2006 (File No.

56

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

57

Exhibit No.	Description of Exhibit
10.13	Amendment, dated November 19, 2007, to Amended and Restated Salary Continuation Agreement, by and between Mountain National Bank and Grace McKinzie.*
21	Subsidiaries of the Registrant
23	Consent of Independent Registered Public Accounting Firm
31.1	Certificate of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certificate of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certificate of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certificate of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Denotes management contract or compensatory plan or arrangement.

     The Company is a party to certain agreements entered into in connection with the offering by MNB Capital Trust I of an aggregate of $5,500,000 in trust preferred securities and the offering by MNB Capital Trust II of an aggregate of $7,500,000 in trust preferred securities, as more fully described in this Annual Report on Form 10-K. In accordance with Item 601(b)(4)(iii) of Regulation S-K, and because the total amount of the trust preferred securities is not in excess of 10% of the Company’s total assets, the Company has not filed the various documents and agreements associated with the trust preferred securities herewith. The Company has, however, agreed to furnish copies of the various documents and agreements associated with the trust preferred securities to the Commission upon request.

58

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MOUNTAIN NATIONAL BANCSHARES, INC. (Registrant)
By:	/s/ Dwight B. Grizzell
	Dwight B. Grizzell
	President and Chief Executive Officer
	Date: March 31, 2008

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Dwight B. Grizzell Dwight B. Grizzell, President, Chief Executive Officer and Director	Date: March 31, 2008
/s/ Richard A. Hubbs Richard A. Hubbs, Senior Vice President and Chief Financial Officer	Date: March 31, 2008
/s/ James E. Bookstaff James E. Bookstaff, Director	Date: March 31, 2008
/s/ Gary A. Helton Gary A. Helton, Director	Date: March 31, 2008
/s/ Charlie R. Johnson Charlie R. Johnson, Director	Date: March 31, 2008
/s/ Sam L. Large Sam L. Large, Director	Date: March 31, 2008

59

/s/ Jeffrey J. Monson Jeffrey J. Monson, Director	Date: March 31, 2008
/s/ Linda N. Ogle Linda N. Ogle, Director	Date: March 31, 2008
/s/ Michael C. Ownby Michael C. Ownby, Director	Date: March 31, 2008
/s/ John R. Parker John R. Parker, Director	Date: March 31, 2008
/s/ Ruth Reams Ruth Reams, Director	Date: March 31, 2008

60

MOUNTAIN NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL REPORT

DECEMBER 31, 2007

CONTENTS

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets		F-2
Consolidated statements of income		F-3
Consolidated statements of changes in shareholders’ equity		F-4
Consolidated statements of cash flows		F-5
Notes to consolidated financial statements		F-6 - F-38

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Mountain National Bancshares, Inc.

We have audited the accompanying consolidated balance sheets of Mountain National Bancshares, Inc. and subsidiary (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

/s/ Crowe Chizek and Company LLC
Brentwood, Tennessee
March 31, 2008

F-1

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006

	2007			2006
ASSETS
Cash and due from banks	$	13,011,580		$	11,717,179
Federal funds sold		3,317,000			1,679,000
Total cash and cash equivalents		16,328,580			13,396,179
Securities available for sale		80,965,512			74,514,075
Securities held to maturity, fair value $2,040,376 in 2007 and $1,577,130 in 2006		2,021,327			1,479,620
Restricted investments, at cost		3,831,618			2,621,167
Loans, net of allowance for loan losses of $3,974,354 in 2007 and $3,524,374 in 2006		393,699,847			341,184,441
Investment in partnership		4,095,085			4,093,228
Premises and equipment		25,427,243			19,944,484
Accrued interest receivable		2,701,402			2,638,219
Cash surrender value of life insurance		8,649,793			8,314,168
Other assets		3,775,619			1,796,435
Total assets	$	541,496,026		$	469,982,016
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand deposits	$	56,307,457		$	60,015,521
NOW accounts		87,380,047			76,069,791
Money market accounts		42,958,868			45,666,777
Savings accounts		8,980,122			8,274,896
Time deposits		208,747,717			171,702,308
Total deposits		404,374,211			361,729,293
Federal funds purchased		1,300,000			15,575,000
Securities sold under agreements to repurchase		5,441,515			5,860,386
Accrued interest payable		1,240,117			956,224
Subordinated debentures		13,403,000			13,403,000
Federal Home Loan Bank advances		65,356,418			36,710,212
Other liabilities		1,432,312			1,337,038
Total liabilities		492,547,573			435,571,153
Commitments and contingencies (Note 12)
Shareholders’ equity:
Common stock, $1.00 par value; 10,000,000 shares authorized; issued and outstanding 2,499,629 shares at December 31, 2007 and 1,943,428 shares at December 31, 2006		2,499,629			1,943,428
Additional paid-in capital		39,426,881			27,096,848
Retained earnings		7,300,933			6,068,324
Accumulated other comprehensive loss		(278,990	)		(697,737	)
Total shareholders’ equity		48,948,453			34,410,863
Total liabilities and shareholders’ equity	$	541,496,026		$	469,982,016

See accompanying Notes to Consolidated Financial Statements

F-2

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2007, 2006 and 2005

	2007		2006		2005
INTEREST INCOME
Loans	$	32,267,281	$	25,286,787	$	16,545,038
Taxable securities		3,575,785		2,947,926		2,108,720
Tax-exempt securities		616,277		529,232		395,695
Federal funds sold and deposits in other banks		254,274		236,900		174,636
Total interest income		36,713,617		29,000,845		19,224,089
INTEREST EXPENSE
Deposits		15,071,725		10,773,481		5,685,712
Federal funds purchased		213,222		149,443		38,563
Repurchase agreements		157,734		101,947		64,165
Federal Home Loan Bank advances		2,599,215		1,343,901		610,943
Subordinated debentures		986,037		748,370		350,152
Total interest expense		19,027,933		13,117,142		6,749,535
Net interest income		17,685,684		15,883,703		12,474,554
Provision for loan losses		981,900		915,000		446,000
Net interest income after provision for loan losses		16,703,784		14,968,703		12,028,554
NONINTEREST INCOME
Service charges on deposit accounts		1,414,005		1,293,026		1,141,994
Other fees and commissions		1,152,851		1,019,664		890,742
Gain on sale of mortgage loans		322,906		424,536		400,657
Gain on sale of securities available for sale, net		—		—		55,378
Other noninterest income		852,381		509,173		187,313
Total noninterest income		3,742,143		3,246,399		2,676,084
NONINTEREST EXPENSE
Salaries and employee benefits		8,992,172		7,542,991		5,372,600
Occupancy expenses		1,080,632		956,688		851,855
Other operating expenses		5,166,693		4,522,713		3,903,100
Total noninterest expense		15,239,497		13,022,392		10,127,555
Income before income taxes		5,206,430		5,192,710		4,577,083
Income taxes		1,294,336		1,295,337		1,453,581
Net income	$	3,912,094	$	3,897,373	$	3,123,502
EARNINGS PER SHARE
Basic	$	1.68	$	1.93	$	1.81
Diluted	$	1.61	$	1.79	$	1.69

See accompanying Notes to Consolidated Financial Statements

F-3

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2007, 2006 and 2005

													Accumulated
							Additional						Other			Total
	Comprehensive			Common			Paid-in			Retained			Comprehensive			Shareholders’
	Income			Stock			Capital			Earnings			Loss			Equity
BALANCE, January 1, 2005				$	1,268,614		$	12,059,704		$	3,400,852		$	(190,257	)		16,538,913
Exercise of stock options, 53,152 shares					53,152			674,677									727,829
5% stock dividend					63,482			1,460,720			(1,540,447	)					(16,245	)
Issuance of common stock					416,500			9,494,863									9,911,363
Comprehensive income:
Net income	$	3,123,502									3,123,502						3,123,502
Other comprehensive income, net of tax:
Unrealized holding loss on securities available for sale, net of reclassification adjustment		(652,354	)		—			—			—			(652,354	)		(652,354	)
Total comprehensive income	$	2,471,148
BALANCE, December 31, 2005					1,801,748			23,689,964			4,983,907			(842,611	)		29,633,008
Exercise of stock options, 35,880 shares					35,880			296,896									332,776
Exercise of stock warrants, 14,922 shares					14,922			343,206									358,128
5% stock dividend					90,878			2,699,076			(2,812,956	)					(23,002	)
Share-based compensation								67,706									67,706
Comprehensive income:
Net income	$	3,897,373									3,897,373						3,897,373
Other comprehensive income, net of tax:
Unrealized holding gain on securities available for sale, net of reclassification adjustment		144,874			—			—			—			144,874			144,874
Total comprehensive income	$	4,042,247
BALANCE, December 31, 2006				$	1,943,428		$	27,096,848		$	6,068,324		$	(697,737	)	$	34,410,863
Exercise of stock options, 32,216 shares					32,216			276,473									308,689
Exercise of stock warrants, 437,896 shares					437,896			9,578,237									10,016,133
Share repurchase program, 10,272 shares					(10,272	)		(289,967	)								(300,239	)
5% stock dividend					96,361			2,553,567			(2,679,485	)					(29,557	)
Share-based compensation								138,596									138,596
Tax benefit from exercise of options								73,127									73,127
Comprehensive income:
Net income	$	3,912,094									3,912,094						3,912,094
Other comprehensive income, net of tax:
Unrealized holding gain on securities available for sale, net of reclassification adjustment		418,747			—			—			—			418,747			418,747
Total comprehensive income	$	4,330,841
BALANCE, December 31, 2007				$	2,499,629		$	39,426,881		$	7,300,933		$	(278,990	)	$	48,948,453

See accompanying Notes to Consolidated Financial Statements

F-4

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,912,094		$	3,897,373		$	3,123,502
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,058,203			1,016,841			913,490
Net realized gains on securities available for sale		—			—			(55,378	)
Net amortization on securities		148,110			219,270			290,013
Activity in held-to-maturity securities:
Increase due to accretion		(92,419	)		(68,230	)		(53,577	)
Provision for loan losses		981,900			915,000			446,000
Gain on sale of other real estate		(271,614	)		(29,095	)		(9,201	)
Deferred income taxes		(460,168	)		(302,492	)		(98,247	)
Gross mortgage loans originated for sale		(33,096,725	)		(43,014,644	)		(40,599,140	)
Gross proceeds from sale of mortgage loans		34,585,892			42,354,341			41,683,581
Gain on sale of mortgage loans		(322,906	)		(424,536	)		(400,657	)
Increase in cash surrender value of life insurance		(335,625	)		(307,101	)		(122,672	)
Share-based compensation		138,596			67,706			—
Tax benefit from exercise of options		(73,127	)		—			—
Change in operating assets and liabilities:
Accrued interest receivable		(63,183	)		(1,113,554	)		(483,346	)
Accrued interest payable		283,893			521,883			208,746
Other assets and liabilities		(2,283,894	)		(5,237,304	)		5,474,005
Net cash provided/(used) in operating activities		4,109,027			(1,504,542	)		10,317,119
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Proceeds from sales, maturities, and calls		17,602,342			9,009,587			18,712,335
Purchases		(23,783,142	)		(26,581,864	)		(26,908,968	)
Activity in held-to-maturity securities:
Purchases		(449,288	)		—			(358,930	)
Purchases of other investments		(1,210,451	)		(992,299	)		(361,563	)
Investment in partnership		(1,857	)		(4,093,228	)		—
Loan originations and principal collections, net		(54,663,567	)		(94,784,688	)		(40,462,915	)
Purchase of premises and equipment		(6,540,962	)		(5,310,462	)		(1,683,355	)
Purchase of life insurance		—			(192,788	)		(3,760,994	)
Proceeds from sale of other real estate		1,204,893			186,185			596,194
Net cash used in investing activities		(67,842,032	)		(122,759,557	)		(54,228,196	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		42,644,918			78,605,503			38,051,771
Proceeds from Federal Home Loan Bank advances		60,000,000			32,250,000			24,100,000
Matured Federal Home Loan Bank advances		(31,353,794	)		(18,049,532	)		(11,140,256	)
Net (decrease)/increase in federal funds purchased		(14,275,000	)		14,075,000			(7,125,000	)
Net (decrease)/increase in securities sold under agreements to repurchase		(418,871	)		2,481,380			529,439
Proceeds from issuance of common stock, including warrants and options		10,324,822			690,904			10,639,191
Tax benefit from exercise of options		73,127
Purchase of common stock		(300,239	)		—			—
Proceeds from issuance of subordinated debentures		—			7,732,000			—
Cash dividends		(29,557	)		(23,002	)		(16,245	)
Net cash provided by financing activities		66,665,406			117,762,253			55,038,900
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		2,932,401			(6,501,846	)		11,127,823
CASH AND CASH EQUIVALENTS, beginning of year		13,396,179			19,898,025			8,770,202
CASH AND CASH EQUIVALENTS, end of period	$	16,328,580		$	13,396,179		$	19,898,025
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest	$	18,744,040		$	12,595,260		$	6,540,789
Income taxes		1,450,000			1,590,000			1,677,906
Non-cash investing and financing activities:
Transfers from loans to other real estate owned		1,843,467			436,185			—

See accompanying Notes to Consolidated Financial Statements

F-5

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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 subsidiary. The Company’s principal subsidiary is Mountain National Bank. All material intercompany 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.

F-6

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 1.	Summary of Significant Accounting Policies (continued)
	Use of estimates: (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. 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. Realized gains and losses on sales of securities are recorded in noninterest 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

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 1.	Summary of Significant Accounting Policies (continued)
	Investment Securities: (continued)
	Restricted equity securities include common stock of the Federal Home Loan Bank of Cincinnati, Silverton Bank stock (formerly The Bankers Bank) and Federal Reserve Bank stock. These securities are carried at cost.
	Declines in the market value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other than temporary impairment losses, management considers the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer. Any decision by management to sell a security classified as available for sale would be based on factors such as, but not limited to, liquidity requirements, changes in pledging requirements or changes in funding sources and terms.
	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. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
	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

F-8

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 1.	Summary of Significant Accounting Policies (continued)
	Loans held for sale: (continued)
	for sale totaled $392,596 and $1,558,857 at December 31, 2007 and 2006, respectively, and are included with loans on the balance sheet.
	Allowance for loan losses:
	The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb 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.
	Loans considered to be impaired are determined under Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan,” paragraph eight. This paragraph states, in part, “A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.” The Bank, through its normal loan review process, determines impairment of loans and records any impaired loans at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of the collateral if the loan is collateral dependent. This loan review may result in a portion of the allowance for loan losses being allocated to the loans.
	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.

F-9

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 1.	Summary of Significant Accounting Policies (continued)
	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 NMTC 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. Other real estate owned totaled $1,328,798 and $500,000 at December 31, 2007 and 2006, respectively, and is included in other assets on the balance sheet.
	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

F-10

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 1.	Summary of Significant Accounting Policies (continued)
	Income taxes: (continued)
	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.
	The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. 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. The adoption had no effect on the Company’s financial statements.
	Advertising costs:
	The Company expenses all advertising costs as incurred. Advertising expense was $455,453, $342,619 and $229,600 for the years ended December 31, 2007, 2006 and 2005, respectively. The increase in advertising expense was primarily due to the Bank’s expansion into the Blount County market.
	Company owned life insurance:
	The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at its cash surrender value, or the amount that can be realized.
	In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The impact of adoption was not material.
	In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance) (“EITF 06-5”). This Issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a

F-11

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 1.	Summary of Significant Accounting Policies (continued)
	Company owned life insurance: (continued)
	greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue requires disclosure when there are contractual restrictions on the Company’s ability to surrender a policy. The adoption of EITF 06-5 on January 1, 2007 had no impact on the Company’s financial condition or results of operation.
	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.
	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. 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.

F-12

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 1.	Summary of Significant Accounting Policies (continued)
	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. These balances do not earn interest.
	Equity:
	Stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings to common stock. Stock dividends for 20% or less 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.
	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. (See “Note 15 — Regulatory Matters” for more specific disclosure.)
	Reclassifications:
	Certain amounts reported in the 2005 and 2006 financial statements have been reclassified to conform to the 2007 presentation.
	Stock-based compensation:
	At December 31, 2007, the Company has a stock-based compensation plan, which is described more fully in “Note 14 — Stock Options and Warrants.” The Company adopted the recognition and measurement principles of SFAS No. 123 (R), “Share-Based Payment” (“SFAS 123(R)”) on January 1, 2006, using the modified prospective transition method. Under this method, stock-based awards that are granted, modified, or settled after December 31, 2005, are measured and accounted for in accordance with SFAS 123 (R). Expense is recognized for unvested awards that were granted prior to January 1, 2006 based upon the fair value determined at the grant date under SFAS 123, “Accounting for Stock-Based Compensation.” (“SFAS 123”) The effect of adopting this accounting pronouncement reduced 2006 pre-tax income by $67,706 and $53,961, net of taxes. Basic and diluted earnings per share decreased by $0.03 and $0.02 for 2006, respectively.

F-13

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 1.	Summary of Significant Accounting Policies (continued)
	Stock-based compensation: (continued)
	Prior to the adoption of SFAS 123 (R), the Company applied the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for the plan. No stock-based employee compensation was reflected in net income as all options granted under this plan had an exercise price equal to or above the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation for the year ended December 31, 2005.

	2005
Net income, as reported	$	3,123,502
Effect of stock-based employee compensation expense determined under fair value method for all awards, net of the related tax effects		(79,518	)
Pro forma net income	$	3,043,984
Earnings per share:
Basic-as reported	$	1.81
Basic-pro forma	$	1.76
Diluted-as reported	$	1.69
Diluted-pro forma	$	1.65

Segment reporting:

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”) provides for the identification of reportable segments on the basis of discreet business units and their financial information to the extent such units are reviewed by an entity’s chief decision maker (which can be an individual or group of management persons). SFAS 131 permits aggregation or combination of segments that have similar characteristics. 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-14

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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, 2007 and 2006 are as follows:

	2007
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available for sale:
U.S. Government securities	$	247,708	$	1,902	$	—		$	249,610
U.S. Government agencies		8,880,411		48,892		(592	)		8,928,711
Obligations of states and political subdivisions		13,833,607		42,239		(64,000	)		13,811,846
Mortgage-backed securities		58,451,192		183,853		(659,700	)		57,975,345
	$	81,412,918	$	276,886	$	(724,292	)	$	80,965,512
Securities held to maturity:
Obligations of states and political subdivisions	$	2,021,327	$	34,490	$	(15,441	)	$	2,040,376

	2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities available for sale:
U.S. Government securities	$	244,804	$	—	$	(1,757	)	$	243,047
U.S. Government agencies		9,373,006		15,888		(97,387	)		9,291,507
Obligations of states and political subdivisions		13,661,394		19,863		(69,533	)		13,611,724
Mortgage-backed securities		52,192,757		120,799		(945,759	)		51,367,797
	$	75,471,961	$	156,550	$	(1,114,436	)	$	74,514,075
Securities held to maturity:
Obligations of states and political subdivisions	$	1,479,620	$	97,510	$	—		$	1,577,130

F-15

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 2.	Securities (continued)
	Securities with unrealized losses at December 31, 2007 and 2006, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

December 31, 2007:

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securties	Value		Loss			Value		Loss			Value		Loss
U. S. Government agencies	$	—	$	—		$	998,440	$	(592	)	$	998,440	$	(592	)
Obligations of states and political subdivisions		4,406,227		(59,279	)		1,595,476		(20,162	)		6,001,703		(79,441	)
Mortgage-backed securities		3,009,017		(30,117	)		30,736,827		(629,583	)		33,745,844		(659,700	)
Total temporarily impaired	$	7,415,244	$	(89,396	)	$	33,330,743	$	(650,337	)	$	40,745,987	$	(739,733	)

As a result, the Company does not believe that gross unrealized losses as of December 31, 2007 represent an other-than-temporary impairment.

F-16

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 2.

Securities (continued)

Unrealized losses on obligations of states and political subdivisions and mortgage-backed securities have not been recognized into income because the issuer(s) bonds are of high credit quality (rated AA or higher), management has the intent and ability to hold for the foreseeable future, as discussed below, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach maturity.

December 31, 2006:

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securties	Value		Loss			Value		Loss			Value		Loss
U. S. Government securities	$	243,047	$	(1,757	)	$	—	$	—		$	243,047	$	(1,757	)
U. S. Government agencies		995,625		(449	)		6,315,413		(96,938	)		7,311,038		(97,387	)
Obligations of states and political subdivisions		5,108,969		(23,492	)		3,407,529		(46,041	)		8,516,498		(69,533	)
Mortgage-backed securities		9,274,782		(38,301	)		33,134,818		(907,458	)		42,409,600		(945,759	)
Total temporarily impaired	$	15,622,423	$	(63,999	)	$	42,857,760	$	(1,050,437	)	$	58,480,183	$	(1,114,436	)

The gross unrealized losses reported for mortgage-backed securities relate primarily to investment securities issued by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and state and local municipalities. Total gross unrealized losses, which represent 0.89% of the amortized cost basis of the Company’s total investment securities, were primarily attributable to changes in interest rates and not due to the credit quality of the investment securities. The Bank’s dependence upon its investment portfolio to provide liquidity during certain periods could, on occasion, create the need to sell an investment security at a price below cost. However, the Company has both the intent and ability to hold the investment securities for a period of time necessary to recover the amortized cost.

At December 31, 2007 and 2006, securities with a carrying value of approximately $60,949,000 and $57,336,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. At December 31, 2007 and 2006, the carrying amount of securities pledged to secure repurchase agreements was approximately $7,757,000 and $7,673,000, respectively.

The amortized cost and estimated fair value of securities at December 31, 2007, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Securities Available for Sale				Securities Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	558,666	$	561,109	$	—	$	—
Due more than one year through five years		3,902,333		3,923,878		—		—
Due more than five years through ten years		6,113,104		6,128,356		—		—
Due after ten years		12,387,623		12,376,824		2,021,327		2,040,376
Mortgage-backed securities		58,451,192		57,975,345		—		—
	$	81,412,918	$	80,965,512	$	2,021,327	$	2,040,376

F-17

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 2.	Securities (continued)
	Proceeds from the sale of securities available for sale were $0 for 2007 and 2006 and $15,403,878 for 2005. Gross gains realized on those sales were $0 in 2007 and 2006 and $61,255 in 2005. Gross losses on those sales were $0 in 2007 and 2006 and $5,877 in 2005.
	We did not hold any securities from a single issuer that exceeded 10% of total shareholders’ equity as of December 31, 2007, except for securities of the U.S. Government or U.S. Government agencies and except for mortgage-backed securities issued by government sponsored entities that had a carrying value of approximately $57,975,000 and $51,368,000 at December 31, 2007 and 2006, respectively.
Note 3.	Loans and Allowance for Loan Losses

At December 31, 2007 and 2006, the Bank’s loans consist of the following (in thousands):

	2007			2006
Mortgage loans on real estate:
Residential 1-4 family	$	57,539,569		$	50,042,141
Residential multifamily		4,554,549			4,505,251
Commercial		107,652,176			92,814,521
Construction		150,843,738			137,988,968
Second mortgages		4,712,743			3,545,056
Equity lines of credit		26,551,874			22,178,562
		351,854,649			311,074,499
Commercial loans		35,929,294			26,062,248
Consumer installment loans:
Personal		7,863,684			5,750,604
Credit cards		2,026,574			1,821,464
		9,890,258			7,572,068
Total loans		397,674,201			344,708,815
Less: Allowance for loan losses		(3,974,354	)		(3,524,374	)
Loans, net	$	393,699,847		$	341,184,441

F-18

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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, 2007, 2006 and 2005 is as follows:

	2007			2006			2005
Balance, beginning of year	$	3,524,374		$	2,634,175		$	2,280,554
Provision for loan losses		981,900			915,000			446,000
Loans charged-off		(561,315	)		(48,957	)		(108,904	)
Recoveries of loans previously charged-off		29,395			24,156			16,525
Balance, end of year	$	3,974,354		$	3,524,374		$	2,634,175

The Bank’s only significant concentration of credit at December 31, 2007 occurred in real estate loans, which totaled approximately $351,855,000. While real estate loans accounted for 88% of total loans, these loans were primarily residential mortgage loans, commercial loans secured by commercial properties and consumer loans. A large portion of these loans are 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 $16,108,000 and $12,176,000 at December 31, 2007 and 2006, respectively. For the year ended December 31, 2007, the activity in these loans included new borrowings approximately of $7,520,000 and repayments of approximately $3,588,000.

Individually impaired loans were as follows:

	2007		2006
Year-end loans with allocated allowance for loan losses	$	368,164	$	1,677,832
Allowance for loan losses on impaired loans		222,691		235,400
Average of individually impaired loans during the year		625,973		1,543,670
Nonperforming loans were as follows:

	2007		2006
Loans past due over 90 days still on accrual	$	18,806	$	470,162
Nonaccrual loans		178,579		—

F-19

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 3.	Loans and Allowance for Loan Losses (continued)
	Nonperforming loans includes both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified as impaired loans.
	Impaired loans without a valuation allowance were insignificant in relation to the Bank’s loan portfolio at December 31, 2007 and 2006.
	Interest income recognized, on both an accrual and cash basis, on impaired loans was insignificant to total interest income on loans for each of the years ended December 31, 2007, 2006 and 2005.
Note 4.	Bank Premises and Equipment
	A summary of Bank premises and equipment at December 31, 2007 and 2006, is as follows:

	2007			2006
Land	$	9,424,151		$	7,952,709
Buildings and improvements		14,919,662			10,772,349
Furniture, fixtures and equipment		6,136,612			5,380,975
		30,480,425			24,106,033
Accumulated depreciation		(5,053,182	)		(4,161,549	)
	$	25,427,243		$	19,944,484

Depreciation expense for the years ended December 31, 2007, 2006 and 2005 amounted to $1,058,203, $1,016,841 and $913,490, respectively.

At December 31, 2007 and 2006, construction in process totaled $1,742,754 and $1,650, respectively, and is included in the buildings and improvements line item above. At December 31, 2007, the balance consisted primarily of costs associated with the construction of our Collier Drive and Justice Center branches. The balance also included costs associated with the construction of our Blount County Regional Headquarters and Operations Center expansion.

F-20

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 5.	Deposits
	The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2007, was approximately $137,138,000.
	At December 31, 2007, the scheduled maturities of time deposits for each of the five years subsequent to December 31, 2007 were as follows:

2008	$	167,294,451
2009		23,269,683
2010		7,880,285
2011		6,805,094
2012		3,498,204
Total	$	208,747,717

	Deposits of employees, officers and directors totaled approximately $9,063,000 at December 31, 2007 and $11,412,000 at December 31, 2006.
Note 6.	Income Taxes
	Income tax expense in the statements of income for the years ended December 31, 2007, 2006 and 2005, consists of the following:

	2007			2006			2005
Current tax expense	$	1,754,504		$	1,597,829		$	1,551,828
Deferred tax expense (benefit)		(460,168	)		(302,492	)		(98,247	)
Income Tax expense	$	1,294,336		$	1,295,337		$	1,453,581

F-21

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 6.	Income Taxes (continued)
	Income tax expense differs from amounts computed by applying the Federal income tax statutory rates of 34% in 2007, 2006 and 2005 to income before income taxes. A reconciliation of the differences for the twelve months ended December 31, 2007, 2006 and 2005 is as follows:

	2007			2006			2005
Expected tax at statutory rates	$	1,770,000		$	1,766,000		$	1,556,000
Increase (decrease) resulting from tax effect of:
State income taxes, net of federal tax		(94,889	)		(97,308	)		28,973
Increase in cash surrender value of life insurance		(114,113	)		(104,414	)		(41,700	)
Tax exempt interest		(200,153	)		(178,324	)		(134,000	)
General business credits, net of basis reduction		(132,000	)		(132,000	)		—
Other		65,491			41,383			44,308
Income tax expense	$	1,294,336		$	1,295,337		$	1,453,581

Significant components of the Company’s deferred tax assets and liabilities at December 31, 2007 and 2006, were as follows:

	2007			2006
Deferred tax assets:
Allowance for loan losses	$	1,254,945		$	1,055,168
Deferred compensation		203,238			121,653
Unrealized loss on securities available for sale		168,417			260,150
Net operating loss		138,250			—
Other		114,046			86,817
Total deferred tax assets		1,878,896			1,523,788
Deferred tax liabilities:
Accelerated depreciation		(371,932	)		(458,602	)
Income from subsidiary		(225,682	)		(226,433	)
Investment in partnership		(136,227	)		—
Other		(118,721	)		(180,854	)
Total deferred tax liabilities		(852,562	)		(865,889	)
Total deferred tax assets	$	1,026,334		$	657,899

F-22

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 6.	Income Taxes (continued)
	The Bank has a Tennessee net operating loss carryforward of approximately $1,590,000 which will expire in 2021 and $1,630,000 which will expire in 2022 if not offset by future taxable income.
	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 2004.
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, multi-family mortgages and junior mortgages have been pledged as collateral for any advances based upon an agreement requiring a collateral-to-loan ratio of 125%, 300%, 300%, 125% and 350%, respectively. Maturities of the notes payable for each of the years subsequent to December 31, 2007 are as follows: $7,456,418 in 2008, $0 in 2009, $200,000 in 2010, $7,500,000 in 2011, $5,200,000 in 2012, $5,000,000 in 2014, and $40,000,000 in 2017. These advances are subject to prepayment penalties that vary according to the type of advance.

FHLB advances consisted of the following at December 31:	2007		2006
Short-term advance requiring monthly interest payments at 5.34% variable, principal due in January 2007		—		4,250,000
Short-term advance requiring monthly interest payments at 5.34% variable, principal due in January 2007		—		1,000,000
Long-term advance requiring monthly interest payments at 5.43% fixed, principal due in November 2007		—		7,000,000
Long-term advance requiring monthly interest payments at 4.47% fixed, principal due in December 2012		200,000		200,000
Long-term advance requiring monthly interest payments at 4.32% fixed, principal due in June 2010		200,000		200,000
Long-term advance requiring monthly interest payments at 4.83% fixed, principal due in October 2008		3,000,000		3,000,000

F-23

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 7. Federal Home Loan Bank Advances (continued)

FHLB advances consisted of the following at December 31:	2007		2006
Long-term advance requiring monthly principal and interest payments at 4.20% fixed, remaining principal due in July 2008		1,756,418		1,860,212
Long-term advance requiring monthly interest payments at 4.15% fixed, principal due in June 2008		2,500,000		2,500,000
Long-term advance requiring monthly interest payments at 4.12% fixed, principal due in June 2008		200,000		200,000
Long-term advance requiring monthly interest payments at 4.84% fixed, principal due in December 2007		—		2,500,000
Long-term advance requiring monthly interest payments at 4.06% fixed, principal due in June 2007		—		2,500,000
Long-term advance requiring monthly interest payments at 5.80% variable, principal due in March 2007		—		4,000,000
Long-term callable advance requiring monthly interest payments at 4.39% fixed, principal due in November 2011		7,500,000		7,500,000
Long-term callable advance requiring monthly interest payments at 4.25% fixed, principal due in January 2017		10,000,000		—
Long-term callable advance requiring monthly interest payments at 4.15% fixed, principal due in April 2017		10,000,000		—
Long-term callable advance requiring monthly interest payments at 4.27% fixed, principal due in May 2017		10,000,000		—
Long-term callable advance requiring monthly interest payments at 4.68% fixed, principal due in June 2017		10,000,000		—
Long-term callable advance requiring monthly interest payments at 3.36% fixed, principal due in December 2012		5,000,000		—
Long-term callable advance requiring monthly interest payments at 3.46% fixed, principal due in December 2014		5,000,000		—
	$	65,356,418	$	36,710,212

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

F-24

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 8.	Subordinated Debentures (continued)
	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 8.279% at December 31, 2007 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 6.843% at December 31, 2007 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.
	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:

	2007			2006
Weighted average borrowing rate at year-end		2.72	%		2.67	%
Weighted average borrowing rate during the year		2.71	%		2.13	%
Average daily balance during the year		5,815,161			4,778,705
Maximum month-end balance during the year		8,602,461			6,889,703
Balance at year-end	$	5,441,515		$	5,860,386

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 $127,580 for 2007, $93,932 for 2006 and $72,876 for 2005.
	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 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 $213,071, $159,969 and $48,444 during 2007, 2006 and 2005, respectively, related to these agreements. The total amount accrued at December 31, 2007, 2006 and 2005 was $530,786, $317,715 and $157,746, respectively.

F-25

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 11.	Leases
	The Bank is leasing the land on which its Gatlinburg branch is located under a noncancelable lease agreement that expires in 2013. This lease agreement contains renewal options for twelve additional five-year terms.
	During 2007, the Bank entered into a long-term lease agreement for land in Blount County, Tennessee. The lease agreement expires in 2013 and contains renewal options for six additional five-year terms. The Bank is constructing its Justice Center branch on this property with an anticipated completion date during the third 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 $152,240 in 2007, $109,549 in 2006 and $103,717 in 2005.
	The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2007:

2008	$	167,932
2009		148,318
2010		129,149
2011		101,745
2012		103,369
Thereafter		78,270
Total	$	728,783

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, 2007, commitments under standby letters of credit and undisbursed loan commitments aggregated approximately $131,299,000 substantially all of which are carried at variable rates.
	Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank

F-26

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 12.	Financial Instruments with Off-Balance-Sheet Risk (continued)
	evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
	Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
	The Bank was not required to perform on any financial guarantees and did not incur any losses on its commitments during 2007, 2006 or 2005.
Note 13.	Fair Value of Financial Instruments
	Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature; involve uncertainties and matters of judgment; and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the Company.
	Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
	Cash and cash equivalents:
	For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
	Investment Securities:
	The fair value of securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers.

F-27

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 13.	Fair Value of Financial Instruments (continued)
	Restricted investments:
	Restricted investments consist of Federal Home Loan Bank, Federal Reserve Bank, and The Bankers Bank stock and the carrying amount approximates fair value based on the stock redemption provisions of each of the entities.
	Loans:
	The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates, adjusted for credit risk and servicing costs. The estimate of maturity is based on historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. The allowance for loan losses is considered a reasonable discount for credit risk.
	Cash surrender value of life insurance:
	The estimated value of cash surrender value of life insurance approximates its carrying value.
	Deposits:
	The fair value of deposits with no stated maturity, such as demand deposits, money market accounts, and savings deposits, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
	Federal funds purchased and securities sold under agreements to repurchase:
	The estimated value of these liabilities, which are extremely short term, approximates their carrying value.
	Subordinated debentures:
	For the subordinated debentures with a floating interest rate tied to LIBOR, the fair value is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for subordinated debentures of similar amounts and remaining maturities.
	Federal Home Loan Bank advances:
	For FHLB advances the fair value is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for FHLB advances of similar amounts and remaining maturities.

F-28

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 13.	Fair Value of Financial Instruments (continued)
	Accrued interest receivable and payable:
	The carrying amounts of accrued interest receivable and payable approximate their fair value.
	Commitments to extend credit, letters of credit and lines of credit:
	The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of these commitments are insignificant and are not included in the table below.
	The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2007 and 2006, are as follows (in thousands):

	2007				2006
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Assets:
Cash and cash equivalents	$	16,329	$	16,329	$	13,396	$	13,396
Investment securities		82,987		83,006		75,994		76,091
Restricted investments		3,832		3,832		2,621		2,621
Loans		393,700		393,117		341,184		340,853
Cash surrender value of life insurance		8,650		8,650		8,314		8,314
Accrued interest receivable		2,701		2,701		2,638		2,638
Liabilities:
Noninterest-bearing demand deposits	$	56,307	$	56,307	$	60,016	$	60,016
NOW accounts		87,380		87,380		76,070		76,070
Savings and money market accounts		51,939		51,939		53,942		53,942
Time deposits		208,748		210,089		171,702		171,596
Subordinated debentures		13,403		14,356		13,403		14,171
Federal funds purchased and securities sold under agreements to repurchase		6,742		6,742		21,435		21,435
Federal Home Loan Bank advances		65,356		67,435		36,710		36,710
Accrued interest payable		1,240		1,240		956		956

Note 14.

Stock Options and Warrants

The Company has a stock option plan that is administered by the Board of Directors and provides for both incentive stock options and nonqualified stock options. The exercise price of each option shall not be less than 100 percent of the fair market value of the common stock on the date of grant. The maximum number of shares that can be issued under the plan is 689,751. At December 31, 2007, there were 349,992 shares remaining

F-29

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 14.	Stock Options and Warrants (continued)
	available for future issuance under equity compensation plans. All options have been granted at the fair market value of the shares at the date of grant. The maximum term for each option is ten years.
	The Company has granted incentive stock options to certain key officers and employees. The Company has also granted nonqualified stock options to non-employee organizers of the Bank. The stock option agreements state that upon termination of employment, employees have 90 days to exercise any stock options vested as of the termination date.
	The Company issues new shares to satisfy option exercises from the authorized shares allocated to the employee stock option plan.
	A summary of activity in the Company’s stock option plan for the year ended December 31, 2007, is as follows:

						Weighted Average
	Number			Weighted Average		Remaining		Aggregate
	of Options			Exercise Price		Contractual Term		Intrinsic Value
Options outstanding, December 31, 2006		182,591		$	12.76
Options granted		49,381			28.54
Options exercised		(33,401	)		9.24
Options forfeited		(6,740	)		28.13
Options outstanding, December 31, 2007		191,831			16.89		5.45	$	1,128,004
Exercisable at December 31, 2007		113,915			10.36		3.50	$	1,370,747

All outstanding options are either fully vested or expected to vest. The weighted-average grant-date fair value of options granted during 2007, 2006 and 2005 was $7.95 per share, $10.38 per share and $5.52 per share, respectively. The total intrinsic value of options exercised during 2007, 2006 and 2005 was $577,539, $653,298 and $798,401, respectively. Cash received from the exercise of options was $308,689, $332,775 and $727,829 in 2007, 2006 and 2005, respectively. Tax benefits realized in 2007 were $73,127 and were insignificant in 2006 and 2005.

As of December 31, 2007, there was $478,373 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the stock option plan. The cost is expected to be recognized over a weighted-average period of 3.10 years.

F-30

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 14.	Stock Options and Warrants (continued)
	The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2007			2006
Dividend yield		0.00	%		0.00	%
Expected life	7.2 years			6.5 years
Expected volatility		19	%		17	%
Risk-free interest rate		4.61	%		4.67	%

	The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using the assumptions noted in the following table. Expected volatilities are based on historical exercise patterns, employee terminations and historical stock prices. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The U.S. Treasury 10 year constant maturity rate in effect at the date of the grant is used to derive the risk-free interest rate for the contractual period of the options.
	During the third quarter of 2005, the Company sold 416,500 shares of common stock. This sale resulted in an increase in common stock and surplus of approximately $9,896,500. In connection with the offering, there were 416,500 warrants issued, one warrant for each share of stock sold, that had an exercise price of $25.20 per warrant. The warrants could be exercised beginning after one year from the date of the sale of the common stock, and had to be exercised no later than two years from the date of the sale. The final day to exercise the common stock warrants was September 7, 2007. During the period in which they could be exercised, 476,194 out of 482,151 (adjusted for 5% stock dividends) warrants were exercised at a weighted average exercise price of $21.77 (adjusted for 5% stock dividends). The total corresponding increase to shareholders’ equity from the conversion of the stock warrants to common stock from September 7, 2006 to September 7, 2007, the period the warrants could be exercised, was approximately $10,367,000.
	At December 31, 2006 and 2005, there were 465,699 and 482,151 warrants outstanding, adjusted for the effect of the June 2006, February 2007 and February 2008 stock dividends.
Note 15.	Regulatory Matters
	The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

F-31

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 15.	Regulatory Matters (continued)
	Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2007, that the Bank met all capital adequacy requirements to which it is subject.
	As of December 31, 2007, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s prompt corrective action category for bank capital.
	The Bank’s actual capital amounts and ratios are presented in the table. Dollar amounts are presented in thousands.

						For Capital
	Actual					Adequacy Purposes					Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2007:
Total capital to risk-weighted assets:
Mountain National Bank	$	63,777		13.97	%	$	36,531		8.00	%	$	45,663		10.00	%
Tier I capital to risk-weighted assets:
Mountain National Bank		59,803		13.10	%		18,265		4.00	%		27,398		6.00	%
Tier I capital to average assets:
Mountain National Bank		59,803		11.24	%		21,288		4.00	%		26,610		5.00	%

						For Capital
	Actual					Adequacy Purposes					Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2006:
Total capital to risk-weighted assets:
Mountain National Bank	$	48,520		12.22	%	$	31,764		8.00	%	$	39,705		10.00	%
Tier I capital to risk-weighted assets:
Mountain National Bank		44,996		11.33	%		15,882		4.00	%		23,823		6.00	%
Tier I capital to average assets:
Mountain National Bank		44,996		9.99	%		18,023		4.00	%		22,528		5.00	%

F-32

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 15.	Regulatory Matters (continued)
	Dividend restrictions:
	The Company’s principal source of funds for dividend payments is dividends received from the Bank. Under applicable federal laws, the Comptroller of the Currency restricts the amount of dividends that may be paid without prior approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. As of December 31, 2007, the Bank could, without prior approval, declare dividends of approximately $3,900,000.
Note 16.	Other Comprehensive Income
	Other comprehensive income (loss) consists of unrealized holding gains and losses on securities available for sale. A summary of other comprehensive income (loss) and the related tax effects for the years ended December 31, 2007, 2006 and 2005 is as follows:

				Tax
	Before-Tax			(Expense)			Net-of-Tax
	Amount			Benefit			Amount
Year ended December 31, 2007:
Unrealized holding gains and losses arising during the period	$	510,480		$	(91,733	)	$	418,747
Less reclassification adjustment for gains realized in net income		—			—			—
	$	510,480		$	(91,733	)	$	418,747
Year ended December 31, 2006:
Unrealized holding gains and losses arising during the period	$	318,796		$	(173,922	)	$	144,874
Less reclassification adjustment for gains realized in net income		—			—			—
	$	318,796		$	(173,922	)	$	144,874
Year ended December 31, 2005:
Unrealized holding gains and losses arising during the period	$	(990,929	)	$	376,553		$	(614,376	)
Less reclassification adjustment for gains realized in net income		61,255			(23,277	)		37,978
	$	(1,052,184	)	$	399,830		$	(652,354	)

F-33

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 17.	Earnings Per Common Share
	Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.
	Potential common shares that may be issued by the Company relate to outstanding stock options and warrants, determined using the treasury stock method.
	Earnings per common share have been computed based on the following:

	2007		2006		2005
Net income applicable to common stock	$	3,912,094	$	3,897,373	$	3,123,502
Average number of common shares outstanding		2,331,396		2,019,783		1,725,539
Dilutive effect of stock options		64,696		88,694		107,413
Dilutive effect of warrants		39,868		72,591		9,977
Average number of common shares outstanding used to calculate diluted earnings per common share		2,435,960		2,181,068		1,842,929

	At December 31, 2007, 2006 and 2005, there were options for the purchase of 44,535, 4,815 and 0 shares, respectively, outstanding that were antidilutive.
Note 18.	Recent Accounting Pronouncements
	In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.” (“SFAS 155”) SFAS 155 permits, but does not require, fair value accounting for hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” (“SFAS 133”) SFAS 155 also eliminated the temporary exemption for interests in securitized financial assets provided for by SFAS 133, Derivatives Implementation Group (“DIG”) Issue D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” The FASB issued interpretive guidance in SFAS 133 during January 2007, DIG Issue B40, “Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets,” in which the FASB concluded that a securitized interest in prepayable financial assets was not subject to the bifurcation requirements of SFAS 155 when the interest met both of the following criteria: (1) the right to accelerate the settlement of the securitized interest cannot be controlled by the

F-34

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 18.	Recent Accounting Pronouncements (continued)
	investor; and (2) the securitized interest itself does not contain an embedded derivative for which bifurcation would be required other than embedded derivative that results solely from the embedded call options in the underlying financial assets. SFAS 155 is effective for all financial instruments acquired or issued after December 31, 2006 as well as to those hybrid financial instruments that had been previously bifurcated under SFAS 133. The guidance in DIG Issue B40 is effective upon the adoption of SFAS 155. As of December 31, 2007, the Company did not have any hybrid financial instruments that were previously bifurcated under SFAS 133 and the guidance provided for in DIG Issue B40 allowed the Company to continue to purchase mortgage-backed securities without applying the bifurcation requirements of SFAS 155. The adoption of SFAS 155 and DIG Issue B40 did not have a material impact on the Company’s financial statements.
	In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material.
	In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.
Note 19.	Stock Dividends
	During January 2005, the Board of Directors approved a 5% stock dividend for stockholders of record as of January 7, 2005. In lieu of fractional shares, certain stockholders received cash payments totaling $16,245. This stock dividend resulted in the issuance of 63,482 additional shares of common stock. All per share data included in the accompanying financial statements reflects this stock dividend.
	During May 2006, the Board of Directors approved a 5% stock dividend for stockholders of record as of June 1, 2006. In lieu of fractional shares, certain stockholders received

F-35

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 19.	Stock Dividends (continued)
	cash payments totaling $23,002. This stock dividend resulted in the issuance of 90,878 additional shares of common stock. All per share data included in the accompanying financial statements reflects this stock dividend.
	During January 2007, the Board of Directors approved a 5% stock dividend for stockholders of record as of February 15, 2007. In lieu of fractional shares, certain stockholders received cash payments totaling $29,557. This stock dividend resulted in the issuance of 96,361 additional shares of common stock. All per share data included in the accompanying financial statements reflects this stock dividend.
	During January 2008, the Board of Directors approved a 5% stock dividend for stockholders of record as of February 15, 2008. In lieu of fractional shares, certain stockholders received cash payments totaling $17,802. This stock dividend resulted in the issuance of 124,718 additional shares of common stock. All per share data included in the accompanying financial statements reflects this stock dividend.

F-36

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 20. Condensed Parent Information

BALANCE SHEETS	2007			2006
ASSETS
Cash	$	2,183,860		$	2,999,826
Investment in subsidiary		59,524,171			44,298,037
Other assets		737,854			612,969
Total assets	$	62,445,885		$	47,910,832
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes payable	$	13,403,000		$	13,403,000
Accrued interest payable		132,265			134,802
Other liabilities		(37,833	)		(37,833	)
Total liabilities		13,497,432			13,499,969
Shareholders’ equity		48,948,453			34,410,863
Total liabilities and shareholders’ equity	$	62,445,885		$	47,910,832

STATEMENTS OF INCOME	2007			2006			2005
INCOME	$	—		$	—		$	—
EXPENSES		1,117,990			881,884			514,948
Loss before equity in undistributed earnings of subsidiary		(1,117,990	)		(881,884	)		(514,948	)
Equity in undistributed earnings of subsidiary		4,595,663			4,441,584			3,434,104
Income tax benefit		434,421			337,673			204,346
Net income	$	3,912,094		$	3,897,373		$	3,123,502

F-37

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Note 20. Condensed Parent Information (continued)

STATEMENTS OF CASH FLOWS	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,912,094		$	3,897,373		$	3,123,502
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiary		(4,595,663	)		(4,441,584	)		(3,434,104	)
Other		(127,423	)		184,838			(276,720	)
Net cash used in operating activities		(810,992	)		(359,373	)		(587,322	)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for investments in and advances to subsidiaries		(10,000,000	)		(7,500,000	)		(8,000,000	)
Net cash used in investing activities		(10,000,000	)		(7,500,000	)		(8,000,000	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends		(29,557	)		(23,002	)		(16,245	)
Proceeds from issuance of common stock		10,324,822			690,903			10,639,191
Proceeds from issuance of subordinated debentures		—			7,732,000			—
Purchase of common stock		(300,239	)		—			—
Net cash provided by financing activities		9,995,026			8,399,901			10,622,946
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(815,966	)		540,528			2,035,624
CASH AND CASH EQUIVALENTS, beginning of year		2,999,826			2,459,298			423,674
CASH AND CASH EQUIVALENTS, end of year	$	2,183,860		$	2,999,826		$	2,459,298
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest	$	988,574		$	607,008		$	350,152
Income taxes		(272,133	)		(411,883	)		(131,675	)

F-38

EX-10.3

Exhibit 10.3

Director* Compensation Summary

Meeting Fees

     Directors of Mountain National Bancshares, Inc. (the “Company”) are paid $650 for each Board meeting attended. The Chairman of the Board receives a fee of $1,500 for each Board meeting attended.

     Directors are reimbursed for their expenses incurred in connection with their activities as the Company’s directors.

Committee Meeting Fees

     Each director receives $225 for each Executive Loan Committee meeting attended and $180 for each other Board committee meeting attended.

Equity Compensation

     Each director is eligible to participate in the Company’s Stock Option Plan.

     The foregoing information is summary in nature. Additional information regarding director compensation will be provided in the Company’s proxy statement to be filed in connection with the 2008 annual meeting of the Company’s shareholders.

* Includes directors that are also employees of the Company.

Named Executive Officer Compensation Summary

     The following table sets forth the current base salary paid to Dwight Grizzell, the Company’s President and Chief Executive Officer, Grace D. McKinzie, the Company’s Executive Vice President-Chief Lending Officer, and Michael Brown, the Company’s Executive Vice President-Chief Operating Officer, during the year ended December 31, 2007.

Executive Officer	Current Salary		2007 Cash
Dwight B. Grizzell, President	$	187,000	$	0
Grace D. McKinzie	$	150,000	$	0
Michael Brown	$	150,000	$	0

     In addition to their base salary, Mr. Grizzell and Ms. McKinzie are also eligible to:

• Participate in the Company’s cash bonus plan;

• Participate in the Company’s equity incentive programs, which currently involves the award of stock options pursuant to the Company’s Stock Option Plan; and

• Participate in the Company’s broad-based benefit programs generally available to its employees, including health, disability and life insurance programs and the Company’s 401(k) Plan.

The foregoing information in summary in nature. Additional information regarding the named executive officer compensation will be provided in the Company’s proxy statement to be filed in connection with the 2008 annual meeting of the Company’s shareholders.

EX-10.8

Exhibit 10.8

AMENDED AND RESTATED EXECUTIVE SALARY
CONTINUATION AGREEMENT

     THIS AGREEMENT, made and entered into this 19^th day of JANUARY, 2007, by and between Mountain National Bank, a bank organized and existing under the laws of the United States of America (hereinafter referred to as the “Bank”), and Dwight B. Grizzell, an Executive of the Bank (hereinafter referred to as the “Executive”).

     WHEREAS, the Bank and the Executive are parties to an Executive Salary Continuation Agreement dated the 25^th day of March, 2003 that provides for the payment of certain benefits. This Amended and Restated Executive Salary Continuation Agreement shall bring the Executive Salary Continuation Agreement dated March 25, 2003, into compliance with Internal Revenue Code §409A enacted on October 22, 2004. The benefits provided hereunder shall amend and restate the existing Executive Salary Continuation Agreement and the benefits provided thereby;

     WHEREAS, the Executive has been and continues to be a valued Executive of the Bank;

     WHEREAS, the purpose of this Agreement is to further the growth and development of the Bank by providing the Executive with supplemental retirement income, and thereby encourage the Executive’s productive efforts on behalf of the Bank and the Bank’s shareholders, and to align the interests of the Executive and those shareholders.

     WHEREAS, it is the desire of the Bank and the Executive to enter into this Agreement under which the Bank will agree to make certain payments to the Executive at retirement or the Executive’s Beneficiary in the event of the Executive’s death pursuant to this Agreement;

     ACCORDINGLY, it is intended that the Agreement be “unfunded” for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and not be construed to provide income to the participant or beneficiary under the Internal Revenue Code of 1986, as amended (the “Code”), particularly §409A of the Code and guidance or regulations issued thereunder, prior to actual receipt of benefits; and

     THEREFORE, it is agreed as follows:

I. EFFECTIVE DATE

     The Effective Date of this Agreement shall be January 1, 2007

II.	EMPLOYMENT
	The Bank agrees to employ the Executive in such capacity as the Bank may from time to time determine. The Executive will continue in the employ of the Bank in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board of Directors of the Bank.

III.	FRINGE BENEFITS
	The benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or an arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these benefits except as set forth hereinafter.
IV.	DEFINITIONS

A.	Retirement Date:
	If the Executive remains in the continuous employ of the Bank, the Executive shall retire from active employment with the Bank on the later of the December 31st nearest the Executive’s sixty-fifth (65th) birthday or Separation from Service.
B.	Normal Retirement Age:
	Normal Retirement Age shall mean the date on which the Executive attains age sixty-five (65).
C.	Early Retirement Date:
	Early Retirement Date shall mean a retirement from employment which is effective prior to the Normal Retirement Age stated herein, provided the Executive has attained age sixty (62).
D.	Plan Year:
	Any reference to “Plan Year” shall mean a calendar year from January 1st to December 31st. In the year of implementation, the term “Plan Year” shall mean the period from the effective date to December 31st of the year of the effective date.
E.	Termination of Employment:
	Termination of Employment shall mean voluntary resignation of employment by the Executive or the Bank’s discharge of the Executive

2

	without cause (Subparagraph IV [F]), prior to the Normal Retirement Age (Subparagraph IV [B]).
F.	Separation from Service:
	“Separation from Service” shall mean that the Executive has experienced a Termination of Employment from the Bank. Where the Executive continues to perform services for the Bank following a Termination of Employment, however, and the facts and circumstances indicate that such services are intended by the Bank and the Executive to be more than “insignificant” services, a Separation from Service will not be deemed to have occurred and any amounts deferred under this Agreement may not be paid or made available to the Executive. The determination of whether such services are considered “insignificant” will be based upon all facts and circumstances relating to the termination and upon any applicable rules and regulations issued under §409A of the Code. Military leave, sick leave, or other bona fide leaves of absence are not generally considered terminations of employment.
G.	Discharge for Cause:
	Notwithstanding anything herein to the contrary, in the event the Executive shall be discharged for cause at any time, all benefits provided herein shall be forfeited. For purposes of this Agreement, “Termination for Cause” shall include termination because of the Executive’s personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation which negatively impacts the Bank (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. For purposes of this Section, the term “willful” is defined to include any act or omission which demonstrates the intentional or reckless disregard for the duties and responsibilities owed to the business of the employer by Executive.
H.	Change of Control:
	“Change of Control” shall mean a change in ownership or control of the Bank as defined in Treasury Regulation §1.409A-3(g)(5) or any subsequently applicable Treasury Regulation.
I.	Disability:
	The Executive is considered disabled if the Executive: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to

3

	result in death or can be expected to last for a continuous period of not less than twelve (12) months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Bank. Medical determination of Disability may be made by either the Social Security Administration or by the provider of an accident or health plan covering employees of the Bank. Upon the request of the Plan Administrator, the Executive must submit proof to the Plan Administrator of Social Security Administration’s or the provider’s determination.
J.	Restriction on Timing of Distribution:
	Notwithstanding any provision of this Agreement to the contrary, distributions to the Executive may not commence earlier than six (6) months after the date of a Separation from Service if, pursuant to §409A of the Code and regulations and guidance promulgated thereunder, the Executive is considered a “specified employee” under §416(i) of the Code. In the event a distribution is delayed pursuant to this paragraph, the originally scheduled payment shall be delayed for six (6) months, and shall commence instead on the first day of the seventh month following the delay. If payments are scheduled to be made in installments, the first six (6) months of installment payments shall be delayed, aggregated, and paid instead on the first day of the seventh month, after which all installment payments shall be made on their regular schedule. If payment is scheduled to be made in a lump sum, the lump payment shall be delayed for six (6) months and instead be made on the first day of the seventh month.
K.	Beneficiary:
	The Executive shall have the right to name a Beneficiary of the Death Benefit. The Executive shall have the right to name such Beneficiary at any time prior to the Executive’s death and submit it to the Plan Administrator (or Plan Administrator’s representative) on the form provided. Once received and acknowledged by the Plan Administrator, the form shall be effective. The Executive may change a Beneficiary designation at any time by submitting a new form to the Plan Administrator. Any such change shall follow the same rules as for the original Beneficiary designation and shall automatically supersede the existing Beneficiary form on file with the Plan Administrator. If the Beneficiary predeceases the Executive, or if the Beneficiary is a spouse and the marriage is dissolved prior to the Executive’s death, the Beneficiary designation shall be automatically revoked.

4

If the Executive dies without a valid Beneficiary designation on file with the Plan Administrator, the Executive’s surviving spouse, if any, shall become the designated Beneficiary. If the Executive has no surviving spouse, death benefits shall be paid to the personal representative of the Executive’s estate.

If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Executive and the Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such distribution amount.

V.

RETIREMENT BENEFIT AND POST-RETIREMENT DEATH BENEFIT

Upon the attainment of the Retirement Date, the Bank shall pay the Executive an annual benefit equal to sixty percent (60%) of the Executive’s average highest three (3) years’ base salary during the term of the Executive’s employment with the Bank. Said benefit shall be paid in equal monthly installments (1/12th of the annual benefit) until the Executive’s death at which time the benefits provided hereunder shall cease. Said payment shall be made the first day of the month following the date of such retirement.

VI.	DEATH BENEFIT PRIOR TO RETIREMENT
	In the event the Executive should die while actively employed by the Bank at any time after the date of this Agreement but prior to the Executive attaining the age of sixty-five (65) years, the Bank will pay the accrued balance on the date of death, of the Executive’s accrued liability retirement account in one (1) lump sum, the first day of the second month following the Executive’s death, to the Beneficiary, at which time this Agreement shall terminate. Said payment due hereunder shall be made by the first day of the second month following the decease of the Executive.
VII.	BENEFIT ACCOUNTING/ACCRUED LIABILITY RETIREMENT ACCOUNT
	The Bank shall account for this benefit using the regulatory accounting principles of the Bank’s primary federal regulator. The Bank shall establish an accrued

5

	liability retirement account for the Executive into which appropriate reserves shall be accrued.
VIII.	VESTING
	Executive’s interest in the accrued liability retirement account shall be subject to an annual vesting percentage as set forth herein below for each full year of service with the Bank from the date of first employment with the Bank (to a maximum of 100%).

Total Years of Employment
with the Bank from the date	Vested Percentage
of first Employment	(to a maximum of 100%)
1-4		0% per year
5		50%
6-10 or more		10% per year

IX. DISABILITY, TERMINATION OF EMPLOYMENT, EARLY RETIREMENT, AND DEATH BENEFIT POST TERMINATION OF EMPLOYMENT, POST DISABILITY, AND POST EARLY RETIREMENT AND PRIOR TO COMPLETION OF ANY INSTALLMENT PAYMENTS HEREUNDER

A.	Termination of Employment:
	In the event that the employment of the Executive shall terminate prior to retirement, early or otherwise, as provided in Paragraph IV, for reasons other than disability, by the Executive’s voluntary action, or by the Executive’s discharge by the Bank without cause, then the Bank shall pay to the Executive an amount of money equal to the accrued balance of the Executive’s liability retirement account on the date of said termination multiplied by the Executive’s cumulative vested percentage (Paragraph VIII). Said payment to be made in a lump sum thirty (30) days following the Executive attaining Normal Retirement Age (Subparagraph IV [B]).
B.	Disability Benefit:
	In the event the Executive becomes Disabled as defined in Subparagraph IV (I), prior to any Termination of Employment, and the Executive’s employment is terminated because of such disability, the Executive shall be entitled to receive one hundred percent (100%) of the Executive’s Accrued Liability Retirement Account balance on the date of said termination due to disability. Said payment shall commence either: (i) thirty (30) days following said termination due to disability and shall be paid in equal monthly installments until the Executive attains age sixty-

6

	five (65), if the Bank’s long term disability policy does not offset for other employer disability payments; or (ii) If the Bank’s long term disability policy does offset for other employer disability payments, then payments shall be in sixty (60) equal monthly installments commencing thirty (30) days following said termination of the Bank’s long term disability policy, or when the Executive attains age sixty-five (65), whichever event shall first occur.
C.	Early Retirement:
	In the event that the Executive shall terminate employment, other than for cause, prior to retirement but on or subsequent to the Executive’s Early Retirement Date (Subparagraph IV [C)]) for reasons other than disability, then the Bank shall pay to the Executive an amount of money equal to the accrued balance of the Executive’s liability retirement account on the date of said early retirement multiplied by the Executive’s cumulative vested percentage (Paragraph VI). This compensation shall be paid in sixty (60) monthly installments and said payment(s) shall commence thirty (30) days following said early retirement.
D.	Death Benefit:
	In the event the Executive should die while actively employed by the Bank at any time after the date of this Agreement but prior to the Executive attaining the age of sixty-five (65) years, the Bank will pay the accrued balance on the date of death, of the Executive’s accrued liability retirement account in one (1) lump sum to the Beneficiary. Said payment due hereunder shall be made by the first day of the second month following the decease of the Executive.

X.	CHANGE OF CONTROL
	If the Executive subsequently suffers a Termination of Employment (voluntary or involuntary), except for cause, anytime subsequent to a Change of Control as defined in Subparagraph IV (H), then the Executive shall receive the benefits in Paragraph IV herein upon attaining Normal Retirement Age, as if the Executive had been continuously employed by the Bank until the Executive’s Normal Retirement Age.
XI.	RESTRICTIONS ON FUNDING
	The Bank shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Executive Plan. The Executive, their beneficiary(ies), or any successor in interest shall be and remain

7

simply a general creditor of the Bank in the same manner as any other creditor having a general claim for matured and unpaid compensation.

The Bank reserves the absolute right, at its sole discretion, to either fund the obligations undertaken by this Executive Plan or to refrain from funding the same and to determine the extent, nature and method of such funding. Should the Bank elect to fund this Executive Plan, in whole or in part, through the purchase of life insurance, mutual funds, disability policies or annuities, the Bank reserves the absolute right, in its sole discretion, to terminate such funding at any time, in whole or in part. At no time shall any Executive be deemed to have any lien, right, title or interest in any specific funding investment or assets of the Bank.

If the Bank elects to invest in a life insurance, disability or annuity policy on the life of the Executive, then the Executive shall assist the Bank by freely submitting to a physical exam and supplying such additional information necessary to obtain such insurance or annuities.

XII. MISCELLANEOUS

A.	Alienability and Assignment Prohibition:
	Neither the Executive, nor the Executive’s surviving spouse, nor any other beneficiary(ies) under this Executive Plan shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or the Executive’s beneficiary(ies), nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. In the event the Executive or any beneficiary attempts assignment, commutation, hypothecation, transfer or disposal of the benefits hereunder, the Bank’s liabilities shall forthwith cease and terminate.
B.	Binding Obligation of the Bank and any Successor in Interest:
	The Bank shall not merge or consolidate into or with another bank or sell substantially all of its assets to another bank, firm or person until such bank, firm or person expressly agrees, in writing, to assume and discharge the duties and obligations of the Bank under this Executive Plan. This Executive Plan shall be binding upon the parties hereto, their successors, beneficiaries, heirs and personal representatives.
C.	Amendment or Revocation:
	It is agreed by and between the parties hereto that, during the lifetime of the Executive, this Executive Plan may be amended or revoked at any time

8

or times, in whole or in part, by the mutual written consent of the Executive and the Bank. Any such amendment shall be subject to Internal Revenue Code §409A.

D.	Gender:
	Whenever in this Executive Plan words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply.
E.	Headings:
	Headings and subheadings in this Executive Plan are inserted for reference and convenience only and shall not be deemed a part of this Executive Plan.
F.	Applicable Law:
	The laws of the State of Tennessee shall govern the validity and interpretation of this Agreement.
G.	Partial Invalidity:
	If any term, provision, covenant, or condition of this Executive Plan is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant, or condition invalid, void, or unenforceable, and the Executive Plan shall remain in full force and effect notwithstanding such partial invalidity.
H.	Not a Contract of Employment:
	This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Bank to discharge the Executive, or restrict the right of the Executive to terminate employment.
I.	Amend and Restate Entire Agreement:
	This Agreement shall amend the Executive Salary Continuation Agreement dated March 25, 2003, and shall restate the entire Agreement of the parties pertaining to this particular Executive Salary Continuation Agreement.
J.	Tax Withholding:
	The Bank shall withhold any taxes that are required to be withheld, under §409A of the Code and regulations thereunder, from the benefits provided

9

under this Agreement. The Executive acknowledges that the Bank’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies).

K.	Opportunity to Consult with Independent Advisors:
	The Executive acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the: (i) terms and conditions which may affect the Executive’s right to these benefits; and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, §280G of the Code, §409A of the Code and guidance or regulations thereunder, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Executive acknowledges and agrees shall be the sole responsibility of the Executive notwithstanding any other term or provision of this Agreement. The Executive further acknowledges and agrees that the Bank shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Executive and further specifically waives any right for himself or herself, and his or her heirs, beneficiaries, legal representative, agents, successor and assign to claim or assert liability on the part of the Bank related to the matters described above in this paragraph. The Executive further acknowledges that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions.
L.	Permissible Acceleration Provision:
	Under §409A(a)(3), a payment of deferred compensation may not be accelerated except as provided in regulations by the Internal Revenue Code. Certain permissible payment accelerations include payments necessary to comply with a domestic relations order, payments necessary to comply with certain conflict of interest rules, payments intended to pay employment taxes, and certain de minimis payments related to the participant’s termination of the Executive’s interest in the plan.

XIII. ADMINISTRATIVE AND CLAIMS PROVISIONS

A.	Plan Administrator:
	The “Plan Administrator” of this Executive Plan shall be Mountain National Bank. As Plan Administrator, the Bank shall be responsible for the management, control and administration of the Executive Plan. The Plan Administrator may delegate to others certain aspects of the

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	management and operation responsibilities of the Executive Plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.
B.	Claims Procedure:

a.	Filing a Claim for Benefits:
	Any insured, beneficiary, or other individual, (“Claimant”) entitled to benefits under this Executive Plan will file a claim request with the Plan Administrator. The Plan Administrator will, upon written request of a Claimant, make available copies of all forms and instructions necessary to file a claim for benefits or advise the Claimant where such forms and instructions may be obtained. If the claim relates to disability benefits, then the Plan Administrator shall designate a sub-committee to conduct the initial review of the claim (and applicable references below to the Plan Administrator shall mean such sub-committee).
b.	Denial of Claim:
	A claim for benefits under this Executive Plan will be denied if the Bank determines that the Claimant is not entitled to receive benefits under the Executive Plan. Notice of a denial shall be furnished the Claimant within a reasonable period of time after receipt of the claim for benefits by the Plan Administrator. This time period shall not exceed more than ninety (90) days after the receipt of the properly submitted claim. In the event that the claim for benefits pertains to disability, the Plan Administrator shall provide written notice within forty-five (45) days. However, if the Plan Administrator determines, in its discretion, that an extension of time for processing the claim is required, such extension shall not exceed an additional ninety (90) days. In the case of a claim for disability benefits, the forty-five (45) day review period may be extended for up to thirty (30) days if necessary due to circumstances beyond the Plan Administrator’s control, and for an additional thirty (30) days, if necessary. Any extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the determination on review.
c.	Content of Notice:
	The Plan Administrator shall provide written notice to every Claimant who is denied a claim for benefits which notice shall set forth the following:

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(i.)	The specific reason or reasons for the denial;
(ii.)	Specific reference to pertinent Executive Plan provisions on which the denial is based;
(iii.)	A description of any additional material or information necessary for the Claimant to perfect the claim, and any explanation of why such material or information is necessary; and
(iv.)	Any other information required by applicable regulations, including with respect to disability benefits.

d.	Review Procedure:
	The purpose of the Review Procedure is to provide a method by which a Claimant may have a reasonable opportunity to appeal a denial of a claim to the Plan Administrator for a full and fair review. The Claimant, or his duly authorized representative, may:

(i.)	Request a review upon written application to the Plan Administrator. Application for review must be made within sixty (60) days of receipt of written notice of denial of claim. If the denial of claim pertains to disability, application for review must be made within one hundred eighty (180) days of receipt of written notice of the denial of claim;
(ii.)	Review and copy (free of charge) pertinent Executive Plan documents, records and other information relevant to the Claimant’s claim for benefits;
(iii.)	Submit issues and concerns in writing, as well as documents, records, and other information relating to the claim.

e.	Decision on Review:
	A decision on review of a denied claim shall be made in the following manner:

(i.)  The Plan Administrator may, in its sole discretion, hold a hearing on the denied claim. If the Claimant’s initial claim is for disability benefits, any review of a denied claim shall

12

	be made by members of the Plan Administrator other than the original decision maker(s) and such person(s) shall not be a subordinate of the original decision maker(s). The decision on review shall be made promptly, but generally not later than sixty (60) days after receipt of the application for review. In the event that the denied claim pertains to disability, such decision shall not be made later than forty-five (45) days after receipt of the application for review. If the Plan Administrator determines that an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial sixty (60) day period. In no event shall the extension exceed a period of sixty (60) days from the end of the initial period. In the event the denied claim pertains to disability, written notice of such extension shall be furnished to the Claimant prior to the termination of the initial forty-five (45) day period. In no event shall the extension exceed a period of thirty (30) days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the determination on review.
(ii.)	The decision on review shall be in writing and shall include specific reasons for the decision written in an understandable manner with specific references to the pertinent Executive Plan provisions upon which the decision is based.
(iii.)	The review will take into account all comments, documents, records and other information submitted by the Claimant relating to the claim without regard to whether such information was submitted or considered in the initial benefit determination. Additional considerations shall be required in the case of a claim for disability benefits. For example, the claim will be reviewed without deference to the initial adverse benefits determination and, if the initial adverse benefit determination was based in whole or in part on a medical judgment, the Plan Administrator will consult with a health care professional with appropriate training and experience in the field of medicine involving the medical judgment. The health care professional who is consulted on appeal will not be the same individual who was consulted during the initial determination or the subordinate of such individual. If the Plan Administrator

13

	obtained the advice of medical or vocational experts in making the initial adverse benefits determination (regardless of whether the advice was relied upon), the Plan Administrator will identify such experts.
(iv.)	The decision on review will include a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records or other information relevant to the Claimant’s claim for benefits.

f.	Exhaustion of Remedies:
	A Claimant must follow the claims review procedures under this Executive Plan and exhaust his or her administrative remedies before taking any further action with respect to a claim for benefits.

C.

Arbitration:

If a claimant continues to dispute the benefit denial based upon completed performance of this Executive Plan or the meaning and effect of the terms and conditions thereof, then the claimant may submit the dispute to an arbitrator for final arbitration. The arbitrator shall be selected by mutual agreement of the Bank and the claimant. The arbitrator shall operate under any generally recognized set of arbitration rules. The parties hereto agree that they and their heirs, personal representatives, successors and assigns shall be bound by the decision of such arbitrator with respect to any controversy properly submitted to it for determination.

XIV.

TERMINATION OR MODIFICATION OF AGREEMENT BY REASON OF CHANGES IN THE LAW, RULES OR REGULATIONS

The Bank is entering into this Agreement upon the assumption that certain existing tax laws, rules and regulations will continue in effect in their current form. If any said assumptions should change and said change has a detrimental effect on this Executive Plan, then the Bank reserves the right to terminate or modify this Agreement accordingly. If this Agreement is terminated, any payment made to the Executive shall be in accordance with the Internal Revenue Code §409A. Upon a Change of Control, this paragraph shall become null and void effective immediately upon said Change of Control.

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          IN WITNESS WHEREOF, the parties hereto acknowledge that each has carefully read this Agreement and executed the original thereof on the first date set forth hereinabove, and that, upon execution, each has received a conforming copy.

	MOUNTAIN NATIONAL BANK Sevierville,Tennessee
/s/ Suzanne E. Lambert	By:	/s/ Michael L. Brown                                      EVP
Witness		(Bank officer other than insured                  Title

/s/ Beverly J. Bosch	/s/ Dwight B. Grizzell
Witness	Dwight B. Grizzell

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EX-10.9

Exhibit 10.9

AMENDMENT
To The
Mountain National Bank
“Amended and Restated Executive Salary Continuation Agreement”

     THIS AMENDMENT is executed on this 19th day of November, 2007, by Mountain National Bank, the “Service Recipient,” a banking corporation operating in the State of Tennessee, hereinafter referred to as the “Bank,” and the “Service Provider,” hereinafter referred to as the “Executive.”

     WHEREAS the Agreement may be amended at any time by the mutual written consent of the parties to the Agreement; and

     WHEREAS the Agreement was previously amended effective January 1, 2007 to comply with Treasury Regulations issued under IRC Section 409A, it is both anticipated and expected that the terms and provisions of this Plan Agreement may need to be amended again in the future to assure continued compliance. The Plan Sponsor and the Participant acknowledge that fact and agree to take any and all steps necessary to operate the plan in “good faith” based on their current understanding of the regulations;

     NOW, THEREFORE, the Plan is hereby amended as follows:

     The Following Articles Amended in their Entirety:

     ARTICLE IV: DEFINITIONS

     I. “Disability”

     “Disability” shall be defined as a condition of the Executive whereby he or she either: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (ii) is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not three months under an accident and health plan covering employees of the Bank. The Plan Administrator will determine whether the Executive has incurred a Disability based on its own good faith determination and may require the Executive to submit to reasonable physical and mental examinations for this purpose. The Executive will also be deemed to have incurred a Disability if determined to be totally disabled by the Social Security Administration, Railroad Retirement Board, or in accordance with a disability insurance program, provided that the definition of disability applied under such disability insurance program complies with the requirements of Treasury Regulation §1.409A-3(i)(4) and authoritative guidance.

     ARTICLE V: RETIREMENT BENEFIT AND POST-RETIREMENT DEATH BENEFIT

     Upon the attainment of the Retirement Date, the Bank shall pay the Executive an annual benefit equal to sixty percent (60%) of the Executive’s average highest (3) years’ base salary during the term of the Executive’s employment with the Bank. Said benefit shall be paid in equal monthly installments (1/12^th of the annual benefit) until the Executive’s death. If the Executive dies prior to having received 240 such monthly installments, said installments shall continue to be paid the Executive’s Beneficiary for the remainder of the 240 month period.

     ARTICLE X: CHANGE OF CONTROL

     If the Executive subsequently suffers a Termination of Employment (voluntary or involuntary), except for cause, anytime subsequent to a Change of Control as defined in Subparagraph IV (H), then the Executive shall receive an annual benefit equal to sixty percent (60%) of the Executive’s average highest (3) years’ base salary during the term of the Executive’s employment with the Bank. Said benefit shall be paid in equal monthly installments (1/12^th of the annual benefit) for a total of 240 months. If the Executive dies prior to having received 240 such monthly installments, said installments shall continue to be paid the Executive’s Beneficiary for the remainder of the 240 month period.

     IN WITNESS OF THE ABOVE, the Bank and the Executive have executed this Amendment to the Agreement.

WITNESS:	FOR MOUNTAIN NATIONAL BANK:
Michael Patterson	/s/ Michael L. Brown
(name)	(signature of authorized officer of Plan Sponsor)
/s/ Michael Patterson	Michael L. Brown
(signature of witness)	(print name)
VP/HR	Executive Vice President
(title if any)	(title of signing officer)
	THE EXECUTIVE:
	/s/ Dwight B. Grizzell
	(signature)
	Dwight B. Grizzell
	(print name)

EX-10.10

Exhibit 10.10

AMENDED AND RESTATED EXECUTIVE SALARY
CONTINUATION AGREEMENT

     THIS AGREEMENT, made and entered into this 19^th day of January, 2007, by and between Mountain National Bank, a bank organized and existing under the laws of the United States of America (hereinafter referred to as the “Bank”), and Michael L. Brown, an Executive of the Bank (hereinafter referred to as the “Executive”).

     WHEREAS, the Bank and the Executive are parties to an Executive Salary Continuation Agreement dated the 25^th day of March, 2003 that provides for the payment of certain benefits. This Amended and Restated Executive Salary Continuation Agreement shall bring the Executive Salary Continuation Agreement dated March 25, 2003, into compliance with Internal Revenue Code §409A enacted on October 22, 2004. The benefits provided hereunder shall amend and restate the existing Executive Salary Continuation Agreement and the benefits provided thereby;

     WHEREAS, the Executive has been and continues to be a valued Executive of the Bank;

     WHEREAS, the purpose of this Agreement is to further the growth and development of the Bank by providing the Executive with supplemental retirement income, and thereby encourage the Executive’s productive efforts on behalf of the Bank and the Bank’s shareholders, and to align the interests of the Executive and those shareholders.

     WHEREAS, it is the desire of the Bank and the Executive to enter into this Agreement under which the Bank will agree to make certain payments to the Executive at retirement or the Executive’s Beneficiary in the event of the Executive’s death pursuant to this Agreement;

     ACCORDINGLY, it is intended that the Agreement be “unfunded” for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and not be construed to provide income to the participant or beneficiary under the Internal Revenue Code of 1986, as amended (the “Code”), particularly §409A of the Code and guidance or regulations issued thereunder, prior to actual receipt of benefits; and

	THEREFORE, it is agreed as follows:
I.	EFFECTIVE DATE
	The Effective Date of this Agreement shall be January 1, 2007.

II.	EMPLOYMENT
	The Bank agrees to employ the Executive in such capacity as the Bank may from time to time determine. The Executive will continue in the employ of the Bank in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board of Directors of the Bank.
III.	FRINGE BENEFITS
	The benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or an arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these benefits except as set forth hereinafter.
IV.	DEFINITIONS

A. Retirement Date:

If the Executive remains in the continuous employ of the Bank, the Executive shall retire from active employment with the Bank on the later of the December 31^st nearest the Executive’s sixty-fifth (65^th) birthday or Separation from Service.

B. Normal Retirement Age:

Normal Retirement Age shall mean the date on which the Executive attains age sixty-five (65).

C. Early Retirement Date:

Early Retirement Date shall mean a retirement from employment which is effective prior to the Normal Retirement Age stated herein, provided the Executive has attained age sixty (62).

D. Plan Year:

Any reference to “Plan Year” shall mean a calendar year from January 1^st to December 31^st. In the year of implementation, the term “Plan Year” shall mean the period from the effective date to December 31^st of the year of the effective date.

E. Termination of Employment:

Termination of Employment shall mean voluntary resignation of employment by the Executive or the Bank’s discharge of the Executive

2

without cause(Subparagraph IV [F]), prior to the Normal Retirement Age (Subparagraph IV [B]).

F. Separation from Service:

“Separation from Service” shall mean that the Executive has experienced a Termination of Employment from the Bank. Where the Executive continues to perform services for the Bank following a Termination of Employment, however, and the facts and circumstances indicate that such services are intended by the Bank and the Executive to be more than “insignificant” services, a Separation from Service will not be deemed to have occurred and any amounts deferred under this Agreement may not be paid or made available to the Executive. The determination of whether such services are considered “insignificant” will be based upon all facts and circumstances relating to the termination and upon any applicable rules and regulations issued under §409A of the Code. Military leave, sick leave, or other bona fide leaves of absence are not generally considered terminations of employment.

G. Discharge for Cause:

Notwithstanding anything herein to the contrary, in the event the Executive shall be discharged for cause at any time, all benefits provided herein shall be forfeited. For purposes of this Agreement, “Termination for Cause” shall include termination because of the Executive’s personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation which negatively impacts the Bank (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. For purposes of this Section, the term “willful” is defined to include any act or omission which demonstrates the intentional or reckless disregard for the duties and responsibilities owed to the business of the employer by Executive.

H. Change of Control:

“Change of Control” shall mean a change in ownership or control of the Bank as defined in Treasury Regulation §1.409A-3(g)(5) or any subsequently applicable Treasury Regulation.

I. Disability:

The Executive is considered disabled if the Executive: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to

3

result in death or can be expected to last for a continuous period of not less than twelve (12) months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Bank. Medical determination of Disability may be made by either the Social Security Administration or by the provider of an accident or health plan covering employees of the Bank. Upon the request of the Plan Administrator, the Executive must submit proof to the Plan Administrator of Social Security Administration’s or the provider’s determination.

J. Restriction on Timing of Distribution:

Notwithstanding any provision of this Agreement to the contrary, distributions to the Executive may not commence earlier than six (6) months after the date of a Separation from Service if, pursuant to §409A of the Code and regulations and guidance promulgated thereunder, the Executive is considered a “specified employee” under §416(i) of the Code. In the event a distribution is delayed pursuant to this paragraph, the originally scheduled payment shall be delayed for six (6) months, and shall commence instead on the first day of the seventh month following the delay. If payments are scheduled to be made in installments, the first six (6) months of installment payments shall be delayed, aggregated, and paid instead on the first day of the seventh month, after which all installment payments shall be made on their regular schedule. If payment is scheduled to be made in a lump sum, the lump payment shall be delayed for six (6) months and instead be made on the first day of the seventh month.

K. Beneficiary:

The Executive shall have the right to name a Beneficiary of the Death Benefit. The Executive shall have the right to name such Beneficiary at any time prior to the Executive’s death and submit it to the Plan Administrator (or Plan Administrator’s representative) on the form provided. Once received and acknowledged by the Plan Administrator, the form shall be effective. The Executive may change a Beneficiary designation at any time by submitting a new form to the Plan Administrator. Any such change shall follow the same rules as for the original Beneficiary designation and shall automatically supersede the existing Beneficiary form on file with the Plan Administrator. If the Beneficiary predeceases the Executive, or if the Beneficiary is a spouse and the marriage is dissolved prior to the Executive’s death, the Beneficiary designation shall be automatically revoked.

4

If the Executive dies without a valid Beneficiary designation on file with the Plan Administrator, the Executive’s surviving spouse, if any, shall become the designated Beneficiary. If the Executive has no surviving spouse, death benefits shall be paid to the personal representative of the Executive’s estate.

If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Executive and the Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such distribution amount.

V. RETIREMENT BENEFIT AND POST-RETIREMENT DEATH BENEFIT

Upon the attainment of the Retirement Date, the Bank shall pay the Executive an annual benefit equal to sixty percent (60%) of the Executive’s average highest three (3) years’ base salary during the term of the Executive’s employment with the Bank. Said benefit shall be paid in equal monthly installments (l/12^th of the annual benefit) until the Executive’s death at which time the benefits provided hereunder shall cease. Said payment shall be made the first day of the month following the date of such retirement.

VI. DEATH BENEFIT PRIOR TO RETIREMENT

In the event the Executive should die while actively employed by the Bank at any time after the date of this Agreement but prior to the Executive attaining the age of sixty-five (65) years, the Bank will pay the accrued balance on the date of death, of the Executive’s accrued liability retirement account in one (1) lump sum, the first day of the second month following the Executive’s death, to the Beneficiary, at which time this Agreement shall terminate. Said payment due hereunder shall be made by the first day of the second month following the decease of the Executive.

VII. BENEFIT ACCOUNTING/ACCRUED LIABILITY RETIREMENT ACCOUNT

The Bank shall account for this benefit using the regulatory accounting principles of the Bank’s primary federal regulator. The Bank shall establish an accrued

5

liability retirement account for the Executive into which appropriate reserves shall be accrued.

VIII. VESTING

Executive’s interest in the accrued liability retirement account shall be subject to an annual vesting percentage as set forth herein below for each full year of service with the Bank from the date of first employment with the Bank (to a maximum of 100%)

Total Years of Employment
with the Bank from the date	Vested Percentage
of first Employment	(to a maximum of 100%)
1-4	0% per year
5	50%
6-10 or more	10% per year

IX. DISABILITY, TERMINATION OF EMPLOYMENT, EARLY RETIREMENT, AND DEATH BENEFIT POST TERMINATION OF EMPLOYMENT, POST DISABILITY, AND POST EARLY RETIREMENT AND PRIOR TO COMPLETION OF ANY INSTALLMENT PAYMENTS HEREUNDER

A. Termination of Employment:

In the event that the employment of the Executive shall terminate prior to retirement, early or otherwise, as provided in Paragraph IV, for reasons other than disability, by the Executive’s voluntary action, or by the Executive’s discharge by the Bank without cause, then the Bank shall pay to the Executive an amount of money equal to the accrued balance of the Executive’s liability retirement account on the date of said termination multiplied by the Executive’s cumulative vested percentage (Paragraph VIII). Said payment to be made in a lump sum thirty (30) days following the Executive attaining Normal Retirement Age (Subparagraph IV [B]).

B. Disability Benefit:

In the event the Executive becomes Disabled as defined in Subparagraph IV (I), prior to any Termination of Employment, and the Executive’s employment is terminated because of such disability, the Executive shall be entitled to receive one hundred percent (100%) of the Executive’s Accrued Liability Retirement Account balance on the date of said termination due to disability. Said payment shall commence either: (i) thirty (30) days following said termination due to disability and shall be paid in equal monthly installments until the Executive attains age sixty-

6

five (65), if the Bank’s long term disability policy does not offset for other employer disability payments; or (ii) If the Bank’s long term disability policy does offset for other employer disability payments, then payments shall be in sixty (60) equal monthly installments commencing thirty (30) days following said termination of the Bank’s long term disability policy, or when the Executive attains age sixty-five (65), whichever event shall first occur.

C.	Early Retirement:
	In the event that the Executive shall terminate employment, other than for cause, prior to retirement but on or subsequent to the Executive’s Early Retirement Date (Subparagraph IV [C)] ) for reasons other than disability, then the Bank shall pay to the Executive an amount of money equal to the accrued balance of the Executive’s liability retirement account on the date of said early retirement multiplied by the Executive’s cumulative vested percentage (Paragraph VI). This compensation shall be paid in sixty (60) monthly installments and said payment(s) shall commence thirty (30) days following said early retirement.
D.	Death Benefit:
	In the event the Executive should die while actively employed by the Bank at any time after the date of this Agreement but prior to the Executive attaining the age of sixty-five (65) years, the Bank will pay the accrued balance on the date of death, of the Executive’s accrued liability retirement account in one (1) lump sum to the Beneficiary. Said payment due hereunder shall be made by the first day of the second month following the decease of the Executive.

X. CHANGE OF CONTROL

If the Executive subsequently suffers a Termination of Employment (voluntary or involuntary), except for cause, anytime subsequent to a Change of Control as defined in Subparagraph IV (H), then the Executive shall receive the benefits in Paragraph IV herein upon attaining Normal Retirement Age, as if the Executive had been continuously employed by the Bank until the Executive’s Normal Retirement Age.

XI. RESTRICTIONS ON FUNDING

The Bank shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Executive Plan. The Executive, their beneficiary(ies), or any successor in interest shall be and remain

7

	simply a general creditor of the Bank in the same manner as any other creditor having a general claim for matured and unpaid compensation.
	The Bank reserves the absolute right, at its sole discretion, to either fund the obligations undertaken by this Executive Plan or to refrain from funding the same and to determine the extent, nature and method of such funding. Should the Bank elect to fund this Executive Plan, in whole or in part, through the purchase of life insurance, mutual funds, disability policies or annuities, the Bank reserves the absolute right, in its sole discretion, to terminate such funding at any time, in whole or in part. At no time shall any Executive be deemed to have any lien, right, title or interest in any specific funding investment or assets of the Bank.
	If the Bank elects to invest in a life insurance, disability or annuity policy on the life of the Executive, then the Executive shall assist the Bank by freely submitting to a physical exam and supplying such additional information necessary to obtain such insurance or annuities.
XII.	MISCELLANEOUS

A.	Alienability and Assignment Prohibition:
	Neither the Executive, nor the Executive’s surviving spouse, nor any other beneficiary(ies) under this Executive Plan shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or the Executive’s beneficiary(ies), nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. In the event the Executive or any beneficiary attempts assignment, commutation, hypothecation, transfer or disposal of the benefits hereunder, the Bank’s liabilities shall forthwith cease and terminate.
B.	Binding Obligation of the Bank and any Successor in Interest:
	The Bank shall not merge or consolidate into or with another bank or sell substantially all of its assets to another bank, firm or person until such bank, firm or person expressly agrees, in writing, to assume and discharge the duties and obligations of the Bank under this Executive Plan. This Executive Plan shall be binding upon the parties hereto, their successors, beneficiaries, heirs and personal representatives.
C.	Amendment or Revocation:
	It is agreed by and between the parties hereto that, during the lifetime of the Executive, this Executive Plan may be amended or revoked at any time

8

	or times, in whole or in part, by the mutual written consent of the Executive and the Bank. Any such amendment shall be subject to Internal Revenue Code §409A.
D.	Gender:
	Whenever in this Executive Plan words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply.
E.	Headings:
	Headings and subheadings in this Executive Plan are inserted for reference and convenience only and shall not be deemed a part of this Executive Plan.
F.	Applicable Law:
	The laws of the State of Tennessee shall govern the validity and interpretation of this Agreement.
G.	Partial Invalidity:
	If any term, provision, covenant, or condition of this Executive Plan is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant, or condition invalid, void, or unenforceable, and the Executive Plan shall remain in full force and effect notwithstanding such partial invalidity.
H.	Not a Contract of Employment:
	This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Bank to discharge the Executive, or restrict the right of the Executive to terminate employment.
I.	Amend and Restate Entire Agreement:
	This Agreement shall amend the Executive Salary Continuation Agreement dated March 25, 2003, and shall restate the entire Agreement of the parties pertaining to this particular Executive Salary Continuation Agreement.
J.	Tax Withholding:
	The Bank shall withhold any taxes that are required to be withheld, under §409A of the Code and regulations thereunder, from the benefits provided

9

	under this Agreement. The Executive acknowledges that the Bank’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies).
K.	Opportunity to Consult with Independent Advisors:
	The Executive acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the: (i) terms and conditions which may affect the Executive’s right to these benefits; and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, §280G of the Code, §409A of the Code and guidance or regulations thereunder, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Executive acknowledges and agrees shall be the sole responsibility of the Executive notwithstanding any other term or provision of this Agreement. The Executive further acknowledges and agrees that the Bank shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Executive and further specifically waives any right for himself or herself, and his or her heirs, beneficiaries, legal representative, agents, successor and assign to claim or assert liability on the part of the Bank related to the matters described above in this paragraph. The Executive further acknowledges that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions.
L.	Permissible Acceleration Provision:
	Under §409A(a)(3), a payment of deferred compensation may not be accelerated except as provided in regulations by the Internal Revenue Code. Certain permissible payment accelerations include payments necessary to comply with a domestic relations order, payments necessary to comply with certain conflict of interest rules, payments intended to pay employment taxes, and certain de minimis payments related to the participant’s termination of the Executive’s interest in the plan.

XIII. ADMINISTRATIVE AND CLAIMS PROVISIONS

A.	Plan Administrator:
	The “Plan Administrator” of this Executive Plan shall be Mountain National Bank. As Plan Administrator, the Bank shall be responsible for

10

	the management, control and administration of the Executive Plan. The Plan Administrator may delegate to others certain aspects of the management and operation responsibilities of the Executive Plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.
B.	Claims Procedure:

a.	Filing a Claim for Benefits:
	Any insured, beneficiary, or other individual, (“Claimant”) entitled to benefits under this Executive Plan will file a claim request with the Plan Administrator. The Plan Administrator will, upon written request of a Claimant, make available copies of all forms and instructions necessary to file a claim for benefits or advise the Claimant where such forms and instructions may be obtained. If the claim relates to disability benefits, then the Plan Administrator shall designate a sub-committee to conduct the initial review of the claim (and applicable references below to the Plan Administrator shall mean such sub-committee).
b.	Denial of Claim:
	A claim for benefits under this Executive Plan will be denied if the Bank determines that the Claimant is not entitled to receive benefits under the Executive Plan. Notice of a denial shall be furnished the Claimant within a reasonable period of time after receipt of the claim for benefits by the Plan Administrator. This time period shall not exceed more than ninety (90) days after the receipt of the properly submitted claim. In the event that the claim for benefits pertains to disability, the Plan Administrator shall provide written notice within forty-five (45) days. However, if the Plan Administrator determines, in its discretion, that an extension of time for processing the claim is required, such extension shall not exceed an additional ninety (90) days. In the case of a claim for disability benefits, the forty-five (45) day review period may be extended for up to -thirty (30) days if necessary due to circumstances beyond the Plan Administrator’s control, and for an additional thirty (30) days, if necessary. Any extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the determination on review.
c.	Content of Notice:
	The Plan Administrator shall provide written notice to every Claimant who is denied a claim for benefits which notice shall set forth the following:

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(i.)	The specific reason or reasons for the denial;
(ii.)	Specific reference to pertinent Executive Plan provisions on which the denial is based;
(iii.)	A description of any additional material or information necessary for the Claimant to perfect the claim, and any explanation of why such material or information is necessary; and
(iv.)	Any other information required by applicable regulations, including with respect to disability benefits.

d.	Review Procedure:
	The purpose of the Review Procedure is to provide a method by which a Claimant may have a reasonable opportunity to appeal a denial of a claim to the Plan Administrator for a full and fair review. The Claimant, or his duly authorized representative, may:

(i.)	Request a review upon written application to the Plan Administrator Application for review must be made within sixty (60) days of receipt of written notice of denial of claim. If the denial of claim pertains to disability, application for review must be made within one hundred eighty (180) days of receipt of written notice of the denial of claim;
(ii.)	Review and copy (free of charge) pertinent Executive Plan documents, records and other information relevant to the Claimant’s claim for benefits;
(iii.)	Submit issues and concerns in writing, as well as documents, records, and other information relating to the claim.

e.	Decision on Review:
	A decision on review of a denied claim shall be made in the following manner:

(i.) The Plan Administrator may, in its sole discretion, hold a hearing on the denied claim. If the Claimant’s initial claim is for disability benefits, any review of a denied claim shall

12

	be made by members of the Plan Administrator other than the original decision maker(s) and such person(s) shall not be a subordinate of the original decision maker(s). The decision on review shall be made promptly, but generally not later than sixty (60) days after receipt of the application for review. In the event that the denied claim pertains to disability, such decision shall not be made later than forty-five (45) days after receipt of the application for review. If the Plan Administrator determines that an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial sixty (60) day period. In no event shall the extension exceed a period of sixty (60) days from the end of the initial period. In the event the denied claim pertains to disability, written notice of such extension shall be furnished to the Claimant prior to the termination of the initial forty-five (45) day period. In no event shall the extension exceed a period of thirty (30) days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the determination on review.
(ii.)	The decision on review shall be in writing and shall include specific reasons for the decision written in an understandable manner with specific references to the pertinent Executive Plan provisions upon which the decision is based.
(iii.)	The review will take into account all comments, documents, records and other information submitted by the Claimant relating to the claim without regard to whether such information was submitted or considered in the initial benefit determination. Additional considerations shall be required in the case of a claim for disability benefits. For example, the claim will be reviewed without deference to the initial adverse benefits determination and, if the initial adverse benefit determination was based in whole or in part on a medical judgment, the Plan Administrator will consult with a health care professional with appropriate training and experience in the field of medicine involving the medical judgment. The health care professional who is consulted on appeal will not be the same individual who was consulted during the initial determination or the subordinate of such individual. If the Plan Administrator

13

	obtained the advice of medical or vocational experts in making the initial adverse benefits determination (regardless of whether the advice was relied upon), the Plan Administrator will identify such experts.
(iv.)	The decision on review will include a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records or other information relevant to the Claimant’s claim for benefits.

f.	Exhaustion of Remedies:
	A Claimant must follow the claims review procedures under this Executive Plan and exhaust his or her administrative remedies before taking any further action with respect to a claim for benefits.

C.

Arbitration:

If a claimant continues to dispute the benefit denial based upon completed performance of this Executive Plan or the meaning and effect of the terms and conditions thereof, then the claimant may submit the dispute to an arbitrator for final arbitration. The arbitrator shall be selected by mutual agreement of the Bank and the claimant. The arbitrator shall operate under any generally recognized set of arbitration rules. The parties hereto agree that they and their heirs, personal representatives, successors and assigns shall be bound by the decision of such arbitrator with respect to any controversy properly submitted to it for determination.

XIV.

TERMINATION OR MODIFICATION OF AGREEMENT BY REASON OF CHANGES IN THE LAW, RULES OR REGULATIONS

The Bank is entering into this Agreement upon the assumption that certain existing tax laws, rules and regulations will continue in effect in their current form. If any said assumptions should change and said change has a detrimental effect on this Executive Plan, then the Bank reserves the right to terminate or modify this Agreement accordingly. If this Agreement is terminated, any payment made to the Executive shall be in accordance with the Internal Revenue Code §409A. Upon a Change of Control, this paragraph shall become null and void effective immediately upon said Change of Control.

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     IN WITNESS WHEREOF, the parties hereto acknowledge that each has carefully read this Agreement and executed the original thereof on the first date set forth hereinabove, and that, upon execution, each has received a conforming copy.

	MOUNTAIN NATIONAL BANK
	Sevierville, Tennessee
/s/ Beverly J. Bosch	By:	/s/ Dwight B. Grizzell	CEO
Witness		(Bank Officer other than Insured)	Title
/s/ Suzanne E. Lambert	/s/ Michael L. Brown
Witness	Michael L. Brown

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EX-10.11

Exhibit 10.11

AMENDMENT
To The
Mountain National Bank
“Amended and Restated Executive Salary Continuation Agreement”

     THIS AMENDMENT is executed on this 19th day of November, 2007, by Mountain National Bank, the “Service Recipient,” a banking corporation operating in the State of Tennessee, hereinafter referred to as the “Bank,” and the “Service Provider,” hereinafter referred to as the “Executive.”

     WHEREAS the Agreement may be amended at any time by the mutual written consent of the parties to the Agreement; and

     WHEREAS the Agreement was previously amended effective January 1, 2007 to comply with Treasury Regulations issued under IRC Section 409A, it is both anticipated and expected that the terms and provisions of this Plan Agreement may need to be amended again in the future to assure continued compliance. The Plan Sponsor and the Participant acknowledge that fact and agree to take any and all steps necessary to operate the plan in “good faith” based on their current understanding of the regulations;

     NOW, THEREFORE, the Plan is hereby amended as follows:

     The Following Articles Amended in their Entirety:

     ARTICLE IV: DEFINITIONS

     I. “Disability”

     “Disability” shall be defined as a condition of the Executive whereby he or she either: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (ii) is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not three months under an accident and health plan covering employees of the Bank. The Plan Administrator will determine whether the Executive has incurred a Disability based on its own good faith determination and may require the Executive to submit to reasonable physical and mental examinations for this purpose. The Executive will also be deemed to have incurred a Disability if determined to be totally disabled by the Social Security Administration, Railroad Retirement Board, or in accordance with a disability insurance program, provided that the definition of disability applied under such disability insurance program complies with the requirements of Treasury Regulation §1.409A-3(i)(4) and authoritative guidance.

     ARTICLE V: RETIREMENT BENEFIT AND POST-RETIREMENT DEATH BENEFIT

     Upon the attainment of the Retirement Date, the Bank shall pay the Executive an annual benefit equal to sixty percent (60%) of the Executive’s average highest (3) years’ base salary during the term of the Executive’s employment with the Bank. Said benefit shall be paid in equal monthly installments (1/12^th of the annual benefit) until the Executive’s death. If the Executive dies prior to having received 240 such monthly installments, said installments shall continue to be paid the Executive’s Beneficiary for the remainder of the 240 month period.

     ARTICLE X: CHANGE OF CONTROL

     If the Executive subsequently suffers a Termination of Employment (voluntary or involuntary), except for cause, anytime subsequent to a Change of Control as defined in Subparagraph IV (H), then the Executive shall receive an annual benefit equal to sixty percent (60%) of the Executive’s average highest (3) years’ base salary during the term of the Executive’s employment with the Bank. Said benefit shall be paid in equal monthly installments (1/12^th of the annual benefit) for a total of 240 months. If the Executive dies prior to having received 240 such monthly installments, said installments shall continue to be paid the Executive’s Beneficiary for the remainder of the 240 month period.

     IN WITNESS OF THE ABOVE, the Bank and the Executive have executed this Amendment to the Agreement.

WITNESS:	FOR MOUNTAIN NATIONAL BANK:
Michael Patterson	/s/ Dwight B. Grizzell
(name)	(signature of authorized officer of Plan Sponsor)
/s/ Michael Patterson	Dwight B. Grizzell
(signature of witness)	(print name)
VP/HR	President & CEO
(title if any)	(title of signing officer)
	THE EXECUTIVE:
	/s/ Michael L. Brown
	(signature)
	Michael L. Brown
	(print name)

EX-10.12

Exhibit 10.12

AMENDED AND RESTATED EXECUTIVE SALARY
CONTINUATION AGREEMENT

     THIS AGREEMENT, made and entered into this 19^th day of JANUARY, 2007, by and between Mountain National Bank, a bank organized and existing under the laws of the United States of America (hereinafter referred to as the “Bank”), and Grace D. McKinzie, an Executive of the Bank (hereinafter referred to as the “Executive”).

     WHEREAS, the Bank and the Executive are parties to an Executive Salary Continuation Agreement dated the 25^th day of March, 2003 that provides for the payment of certain benefits. This Amended and Restated Executive Salary Continuation Agreement shall bring the Executive Salary Continuation Agreement dated March 25, 2003, into compliance with Internal Revenue Code §409A enacted on October 22, 2004. The benefits provided hereunder shall amend and restate the existing Executive Salary Continuation Agreement and the benefits provided thereby;

     WHEREAS, the Executive has been and continues to be a valued Executive of the Bank;

     WHEREAS, the purpose of this Agreement is to further the growth and development of the Bank by providing the Executive with supplemental retirement income, and thereby encourage the Executive’s productive efforts on behalf of the Bank and the Bank’s shareholders, and to align the interests of the Executive and those shareholders.

     WHEREAS, it is the desire of the Bank and the Executive to enter into this Agreement under which the Bank will agree to make certain payments to the Executive at retirement or the Executive’s Beneficiary in the event of the Executive’s death pursuant to this Agreement;

     ACCORDINGLY, it is intended that the Agreement be “unfunded” for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and not be construed to provide income to the participant or beneficiary under the Internal Revenue Code of 1986, as amended (the “Code”), particularly §409A of the Code and guidance or regulations issued thereunder, prior to actual receipt of benefits; and

     THEREFORE, it is agreed as follows:

I.	EFFECTIVE DATE
	The Effective Date of this Agreement shall be January 1, 2007.

II.	EMPLOYMENT
	The Bank agrees to employ the Executive in such capacity as the Bank may from time to time determine. The Executive will continue in the employ of the Bank in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board of Directors of the Bank.
III.	FRINGE BENEFITS
	The benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or an arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these benefits except as set forth hereinafter.
IV.	DEFINITIONS

A.	Retirement Date:
	If the Executive remains in the continuous employ of, the Bank, the Executive shall retire from active employment with the Bank on the later of the December 31st nearest the Executive’s sixty-fifth (65th) birthday or Separation from Service.
B.	Normal Retirement Age:
	Normal Retirement Age shall mean the date on which the Executive attains age sixty-five (65).
C.	Early Retirement Date:
	Early Retirement Date shall mean a retirement from employment which is effective prior to the Normal Retirement Age stated herein, provided the Executive has attained age sixty (62).
D.	Plan Year:
	Any reference to “Plan Year” shall mean a calendar year from January 1st to December 31st In the year of implementation, the term “Plan Year” shall mean the period from the effective date to December 31st of the year of the effective date.
E.	Termination of Employment:
	Termination of Employment shall mean voluntary resignation of employment by the Executive or the Bank’s discharge of the Executive

2

	without cause (Subparagraph IV [F]), prior to the Normal Retirement Age (Subparagraph IV [B]).
F.	Separation from Service:
	“Separation from Service” shall mean that the Executive has experienced a Termination of Employment from the Bank. Where the Executive continues to perform services for the Bank following a Termination of Employment, however, and the facts and circumstances indicate that such services are intended by the Bank and the Executive to be more than “insignificant” services, a Separation from Service will not be deemed to have occurred and any amounts deferred under this Agreement may not be paid or made available to the Executive. The determination of whether such services are considered “insignificant” will be based upon all facts and circumstances relating to the termination and upon any applicable rules and regulations issued under §409A of the Code. Military leave, sick leave, or other bona fide leaves of absence are not generally considered terminations of employment.
G.	Discharge for Cause:
	Notwithstanding anything herein to the contrary, in the event the Executive shall be discharged for cause at any time, all benefits provided herein shall be forfeited. For purposes of this Agreement, “Termination for Cause” shall include termination because of the Executive’s personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation which negatively impacts the Bank (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. For purposes of this Section, the term “willful” is defined to include any act or omission which demonstrates the intentional or reckless disregard for the duties and responsibilities owed to the business of the employer by Executive.
H.	Change of Control:
	“Change of Control” shall mean a change in ownership or control of the Bank as defined in Treasury Regulation §1.409A-3(g)(5) or any subsequently applicable Treasury Regulation.
I.	Disability:
	The Executive is considered disabled if the Executive: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to

3

result in death or can be expected to last for a continuous period of not less than twelve (12) months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Bank. Medical determination of Disability may be made by either the Social Security Administration or by the provider of an accident or health plan covering employees of the Bank. Upon the request of the Plan Administrator, the Executive must submit proof to the Plan Administrator of Social Security Administration’s or the provider’s determination.

J.	Restriction on Timing of Distribution:
	Notwithstanding any provision of this Agreement to the contrary, distributions to .the Executive may not commence earlier than six (6) months after the date of a Separation from Service if, pursuant to §409A of the Code and regulations and guidance promulgated thereunder, the Executive is considered a “specified employee” under §416(i) of the Code. In the event a distribution is delayed pursuant to this paragraph, the originally scheduled payment shall be delayed for six (6) months, and shall commence instead on the first day of the seventh month following the delay. If payments are scheduled to be made in installments, the first six (6) months of installment payments shall be delayed, aggregated, and paid instead on the first day of the seventh month, after which all installment payments shall be made on their regular schedule. If payment is scheduled to be made in a lump sum, the lump payment shall be delayed for six (6) months and instead be made on the first day of the seventh month.
K.	Beneficiary:
	The Executive shall have the right to name a Beneficiary of the Death Benefit. The Executive shall have the right to name such Beneficiary at any time prior to the Executive’s death and submit it to the Plan Administrator (or Plan Administrator’s representative) on the form provided. Once received and acknowledged by the Plan Administrator, the form shall be effective. The Executive may change a Beneficiary designation at any time by submitting a new form to the Plan Administrator. Any such change shall follow the same rules as for the original Beneficiary designation and shall automatically supersede the existing Beneficiary form on file with the Plan Administrator. If the Beneficiary predeceases the Executive, or if the Beneficiary is a spouse and the marriage is dissolved prior to the Executive’s death, the Beneficiary designation shall be automatically revoked.

4

If the Executive dies without a valid Beneficiary designation on file with the Plan Administrator, the Executive’s surviving spouse, if any, shall become the designated Beneficiary. If the Executive has no surviving spouse, death benefits shall be paid to the personal representative of the Executive’s estate.

If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Executive and the Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such distribution amount.

V.	RETIREMENT BENEFIT AND POST-RETIREMENT DEATH BENEFIT
	Upon the attainment of the Retirement Date, the Bank shall pay the Executive an annual benefit equal to sixty percent (60%) of the Executive’s average highest three (3) years’ base salary during the term of the Executive’s employment with the Bank. Said benefit shall be paid in equal monthly installments (1/12th of the annual benefit) until the Executive’s death at which time the benefits provided hereunder shall cease. Said payment shall be made the first day of the month following the date of such retirement.
VI.	DEATH BENEFIT PRIOR TO RETIREMENT
	In the event the Executive should die while actively employed by the Bank at any time after the date of this Agreement but prior to the Executive attaining the age of sixty-five (65) years, the Bank will pay the accrued balance on the date of death, of the Executive’s accrued liability retirement account in one (1) lump sum, the first day of the second month following the Executive’s death, to the Beneficiary, at which time this Agreement shall terminate. Said payment due hereunder shall be made by the first day of the second month following the decease of the Executive.
VII.	BENEFIT ACCOUNTING/ACCRUED LIABILITY RETIREMENT ACCOUNT
	The Bank shall account for this benefit using the regulatory accounting principles of the Bank’s primary federal regulator. The Bank shall establish an accrued

5

	liability retirement account for the Executive into which appropriate reserves shall be accrued.
VIII.	VESTING
	Executive’s interest in the accrued liability retirement account shall be subject to an annual vesting percentage as set forth herein below for each full year of service with the Bank from the date of first employment with the Bank (to a maximum of 100%).

Total Years of Employment
with the Bank from the date	Vested Percentage
of first Employment	(to a maximum of 100%)
1-4	0% per year
5		50%
6-10 or more	10% per year

IX. DISABILITY, TERMINATION OF EMPLOYMENT, EARLY RETIREMENT, AND DEATH BENEFIT POST TERMINATION OF EMPLOYMENT, POST DISABILITY,AND POST EARLY RETIREMENT AND PRIOR TO COMPLETION OF ANY INSTALLMENT PAYMENTS HEREUNDER

A.	Termination of Employment:
	In the event that the employment of the Executive shall terminate prior to retirement, early or otherwise, as provided in Paragraph IV, for reasons other than disability, by the Executive’s voluntary action, or by the Executive’s discharge by the Bank without cause, then the Bank shall pay to the Executive an amount of money equal to the accrued balance of the Executive’s liability retirement account on the date of said termination multiplied by the Executive’s cumulative vested percentage (Paragraph VIII). Said payment to be made in a lump sum thirty (30) days following the Executive attaining Normal Retirement Age (Subparagraph IV [B]).
B.	Disability Benefit:
	In the event the Executive becomes Disabled as defined in Subparagraph IV (I), prior to any Termination of Employment, and the Executive’s employment is terminated because of such disability, the Executive shall be entitled to receive one hundred percent (100%) of the Executive’s Accrued Liability Retirement Account balance on the date of said termination due to disability. Said payment shall commence either: (i) thirty (30) days following said termination due to disability and shall be paid in equal monthly installments until the Executive attains age sixty-

6

	five (65), if the Bank’s long term disability policy does not offset for other employer disability payments; or (ii) If the Bank’s long term disability policy does offset for other employer disability payments, then payments shall be in sixty (60) equal monthly installments commencing thirty (30) days following said termination of the Bank’s long term disability policy, or when the Executive attains age sixty-five (65), whichever event shall first occur.
C.	Early Retirement:
	In the event that the Executive shall terminate employment, other than for cause, prior to retirement but on or subsequent to the Executive’s Early Retirement Date (Subparagraph IV [C)]) for reasons other than disability, then the Bank shall pay to the Executive an amount of money equal to the accrued balance of the Executive’s liability retirement account on the date of said early retirement multiplied by the Executive’s cumulative vested percentage (Paragraph VI). This compensation shall be paid in sixty (60) monthly installments and said payment(s) shall commence thirty (30) days following said early retirement.
D.	Death Benefit:
	In the event the Executive should die while actively employed by the Bank at any time after the date of this Agreement but prior to the Executive attaining the age of sixty-five (65) years, the Bank will pay the accrued balance on the date of death, of the Executive’s accrued liability retirement account in one (1) lump sum to the Beneficiary. Said payment due hereunder shall be made by the first day of the second month following the decease of the Executive.

X.	CHANGE OF CONTROL
	If the Executive subsequently suffers a Termination of Employment (voluntary or involuntary), except for cause, anytime subsequent to a Change of Control as defined in Subparagraph IV (H), then the Executive shall receive the benefits in Paragraph IV herein upon attaining Normal Retirement Age, as if the Executive had been continuously employed by the Bank until the Executive’s Normal Retirement Age.
XI.	RESTRICTIONS ON FUNDING
	The Bank shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Executive Plan. The Executive, their beneficiary(ies), or any successor in interest shall be and remain

7

simply a general creditor of the Bank in the same manner as any other creditor having a general claim for matured and unpaid compensation.

The Bank reserves the absolute right, at its sole discretion, to either fund the obligations undertaken by this Executive Plan or to refrain from funding the same and to determine the extent, nature and method of such funding. Should the Bank elect to fund this Executive Plan, in whole or in part, through the purchase of life insurance, mutual funds, disability policies or annuities, the Bank reserves the absolute right, in its sole discretion, to terminate such funding at any time, in whole or in part. At no time shall any Executive be deemed to have any lien, right, title or interest in any specific funding investment or assets of the Bank.

If the Bank elects to invest in a life insurance, disability or annuity policy on the life of the Executive, then the Executive shall assist the Bank by freely submitting to a physical exam and supplying such additional information necessary to obtain such insurance or annuities.

XII. MISCELLANEOUS

A.	Alienability and Assignment Prohibition:
	Neither the Executive, nor the Executive’s surviving spouse, nor any other beneficiary(ies) under this Executive Plan shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or the Executive’s beneficiary(ies), nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. In the event the Executive or any beneficiary attempts assignment, commutation, hypothecation, transfer or disposal of the benefits hereunder, the Bank’s liabilities shall forthwith cease and terminate.
B.	Binding Obligation of the Bank and any Successor in Interest:
	The Bank shall not merge or consolidate into or with another bank or sell substantially all of its assets to another bank, firm or person until such bank, firm or person expressly agrees, in writing, to assume and discharge the duties and obligations of the Bank under this Executive Plan. This Executive Plan shall be binding upon the parties hereto, their successors, beneficiaries, heirs and personal representatives.
C.	Amendment or Revocation:
	It is agreed by and between the parties hereto that, during the lifetime of the Executive, this Executive Plan may be amended or revoked at any time

8

	or times, in whole or in part, by the mutual written consent of the Executive and the Bank. Any such amendment shall be subject to Internal Revenue Code §409A.
D.	Gender:
	Whenever in this Executive Plan words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply.
E.	Headings:
	Headings and subheadings in this Executive Plan are inserted for reference and convenience only and shall not be deemed a part of this Executive Plan.
F.	Applicable Law:
	The laws of the State of Tennessee shall govern the validity and interpretation of this Agreement.
a.	Partial Invalidity:
	If any term, provision, covenant, or condition of this Executive Plan is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant, or condition invalid, void, or unenforceable, and the Executive Plan shall remain in full force and effect notwithstanding such partial invalidity.
H.	Not a Contract of Employment:
	This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Bank to discharge the Executive, or restrict the right of the Executive to terminate employment.
I.	Amend and Restate Entire Agreement:
	This Agreement shall amend the Executive Salary Continuation Agreement dated March 25, 2003, and shall restate the entire Agreement of the parties pertaining to this particular Executive Salary Continuation Agreement.

9

J.	Tax Withholding:
	The Bank shall withhold any taxes that are required to be withheld, under §409A of the Code and regulations thereunder, from the benefits provided under this Agreement. The Executive acknowledges that the Bank’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies).
K.	Opportunity to Consult with Independent Advisors:
	The Executive acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the: (i) terms and conditions which may affect the Executive’s right to these benefits; and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, §280G of the Code, §409A of the Code and guidance or regulations thereunder, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Executive acknowledges and agrees shall be the sole responsibility of the Executive notwithstanding any other term or provision of this Agreement. The Executive further acknowledges and agrees that the Bank shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Executive and further specifically waives any right for himself or herself, and his or her heirs, beneficiaries, legal representative, agents, successor and assign to claim or assert liability on the part of the Bank related to the matters described above in this paragraph. The Executive further acknowledges that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions.
L.	Permissible Acceleration Provision:
	Under §409A(a)(3), a payment of deferred compensation may not be accelerated except as provided in regulations by the Internal Revenue Code. Certain permissible payment accelerations include payments necessary to comply with a domestic relations order, payments necessary to comply with certain conflict of interest rules, payments intended to pay employment taxes, and certain de minimis payments related to the participant’s termination of the Executive’s interest in the plan.

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XIII. ADMINISTRATIVE AND CLAIMS PROVISIONS

A.

Plan Administrator:

The “Plan Administrator” of this Executive Plan shall be Mountain National Bank. As Plan Administrator, the Bank shall be responsible for the management, control and administration of the Executive Plan. The Plan Administrator may delegate to others certain aspects of the management and operation responsibilities of the Executive Plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.

B. Claims Procedure:

a.	Filing a Claim for Benefits:
	Any insured, beneficiary, or other individual, (“Claimant”) entitled to benefits under this Executive Plan will file a claim request with the Plan Administrator. The Plan Administrator will, upon written request of a Claimant, make available copies of all forms and instructions necessary to file a claim for benefits or advise the Claimant where such forms and instructions may be obtained. If the claim relates to disability benefits, then the Plan Administrator shall designate a sub-committee to conduct the initial review of the claim (and applicable references below to the Plan Administrator shall mean such sub-committee).
b.	Denial of Claim:
	A claim for benefits under this Executive Plan will be denied if the Bank determines that the Claimant is not entitled to receive benefits under the Executive Plan. Notice of a denial shall be furnished the Claimant within a reasonable period of time after receipt of the claim for benefits by the Plan Administrator. This time period shall not exceed more than ninety (90) days after the receipt of the properly submitted claim. In the event that the claim for benefits pertains to disability, the Plan Administrator shall provide written notice within forty-five (45) days. However, if the Plan Administrator determines, in its discretion, that an extension of time for processing the claim is required, such extension shall not exceed an additional ninety (90) days. In the case of a claim for disability benefits, the forty-five (45) day review period may be extended for up to thirty (30) days if necessary due to circumstances beyond the Plan Administrator’s control, and for an additional thirty (30) days, if necessary. Any extension notice shall

11

	indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the determination on review.
c.	Content of Notice:
	The Plan Administrator shall provide written notice to every Claimant who is denied a claim for benefits which notice shall set forth the following:

(i.)	The specific reason or reasons for the denial;
(ii.)	Specific reference to pertinent Executive Plan provisions on which the denial is based;
(iii.)	A description of any additional material or information necessary for the Claimant to perfect the claim, and any explanation of why such material or information is necessary; and
(iv.)	Any other information required by applicable regulations, including with respect to disability benefits.

d.	Review Procedure:
	The purpose of the Review Procedure is to provide a method by which a Claimant may have a reasonable opportunity to appeal a denial of a claim to the Plan Administrator for a full and fair review. The Claimant, or his duly authorized representative, may:

(i.)	Request a review upon written application to the Plan Administrator. Application for review must be made within sixty (60) days of receipt of written notice of denial of claim. If the denial of claim pertains to disability, application for review must be made within one hundred eighty (180) days of receipt of written notice of the denial of claim;
(ii.)	Review and copy (free of charge) pertinent Executive Plan documents, records and other information relevant to the Claimant’s claim for benefits;
(iii.)	Submit issues and concerns in writing, as well as documents, records, and other information relating to the claim.

12

e.	Decision on Review:
	A decision on review of a denied claim shall be made in the following manner:

(i.)	The Plan Administrator may, in its sole discretion, hold a hearing on the denied claim. If the Claimant’s initial claim is for disability benefits, any review of a denied claim shall be made by members of the Plan Administrator other than the original decision maker(s) and such person(s) shall not be a subordinate of the original decision maker(s). The decision on review shall be made promptly, but generally not later than sixty (60) days after receipt of the application for review. In the event that the denied claim pertains to disability, such decision shall not be made later than forty-five (45) days after receipt of the application for review. If the Plan Administrator determines that an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial sixty (60) day period. In no event shall the extension exceed a period of sixty (60) days from the end of the initial period. In the event the denied claim pertains to disability, written notice of such extension shall be furnished to the Claimant prior to the termination of the initial forty-five (45) day period. In no event shall the extension exceed a period of thirty (30) days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the determination on review.
(ii.)	The decision on review shall be in writing and shall include specific reasons for the decision written in an understandable manner with specific references to the pertinent Executive Plan provisions upon which the decision is based.
(iii.)	The review will take into account all comments, documents, records and other information submitted by the Claimant relating to the claim without regard to whether such information was submitted or considered in the initial benefit determination. Additional considerations shall be required in the case of a claim for disability benefits. For example, the claim will be reviewed without deference to

13

the initial adverse benefits determination and, if the initial adverse benefit determination was based in whole or in part on a medical judgment, the Plan Administrator will consult with a health care professional with appropriate training and experience in the field of medicine involving the medical judgment. The health care professional who is consulted on appeal will not be the same individual who was consulted during the initial determination or the subordinate of such individual. If the Plan Administrator obtained the advice of medical or vocational experts in making the initial adverse benefits determination (regardless of whether the advice was relied upon), the Plan Administrator will identify such experts.

(iv.) The decision on review will include a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records or other information relevant to the Claimant’s claim for benefits.

f.	Exhaustion of Remedies:
	A Claimant must follow the claims review procedures under this Executive Plan and exhaust his or her administrative remedies before taking any further action with respect to a claim for benefits.

C.

Arbitration:

If a claimant continues to dispute the benefit denial based upon completed performance of this Executive Plan or the meaning and effect of the terms and conditions thereof, then the claimant may submit the dispute to an arbitrator for final arbitration. The arbitrator shall be selected by mutual agreement of the Bank and the claimant. The arbitrator shall operate under any generally recognized set of arbitration rules. The parties hereto agree that they and their heirs, personal representatives, successors and assigns shall be bound by the decision of such arbitrator with respect to any controversy properly submitted to it for determination.

XIV.	TERMINATION OR MODIFICATION OF AGREEMENT BY REASON OF CHANGES IN THE LAW, RULES OR REGULATIONS
	The Bank is entering into this Agreement upon the assumption that certain existing tax laws, rules and regulations will continue in effect in their current form. If any said assumptions should change and said change has a detrimental effect on this Executive Plan, then the Bank reserves the right to terminate or

14

modify this Agreement accordingly. If this Agreement is terminated, any payment made to the Executive shall be in accordance with the Internal Revenue Code §409A. Upon a Change of Control, this paragraph shall become null and void effective immediately upon said Change of Control.

     IN WITNESS WHEREOF, the parties hereto acknowledge that each has carefully read this Agreement and executed the original thereof on the first date set forth hereinabove, and that, upon execution, each has received a conforming copy.

	MOUNTAIN NATIONAL BANK
	Sevierville, Tennessee
/s/ Beverly J. Bosch	By:	/s/ Michael L. Brown                                 EVP
Witness		(Bank Officer other than Insured)          Title
/s/ [ILLEGIBLE]	/s/ Grace D. McKinzie
Witness	Grace D. McKinzie

15

EX-10.13

Exhibit 10.13

AMENDMENT
To The
Mountain National Bank
“Amended and Restated Executive Salary Continuation Agreement”

     THIS AMENDMENT is executed on this 19th day of November, 2007, by Mountain National Bank, the “Service Recipient,” a banking corporation operating in the State of Tennessee, hereinafter referred to as the “Bank,” and the “Service Provider,” hereinafter referred to as the “Executive.”

     WHEREAS the Agreement may be amended at any time by the mutual written consent of the parties to the Agreement; and

     WHEREAS the Agreement was previously amended effective January 1, 2007 to comply with Treasury Regulations issued under IRC Section 409A, it is both anticipated and expected that the terms and provisions of this Plan Agreement may need to be amended again in the future to assure continued compliance. The Plan Sponsor and the Participant acknowledge that fact and agree to take any and all steps necessary to operate the plan in “good faith” based on their current understanding of the regulations;

     NOW, THEREFORE, the Plan is hereby amended as follows:

     The Following Articles Amended in their Entirety:

     ARTICLE IV: DEFINITIONS

     I. “Disability”

     “Disability” shall be defined as a condition of the Executive whereby he or she either: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (ii) is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not three months under an accident and health plan covering employees of the Bank. The Plan Administrator will determine whether the Executive has incurred a Disability based on its own good faith determination and may require the Executive to submit to reasonable physical and mental examinations for this purpose. The Executive will also be deemed to have incurred a Disability if determined to be totally disabled by the Social Security Administration, Railroad Retirement Board, or in accordance with a disability insurance program, provided that the definition of disability applied under such disability insurance program complies with the requirements of Treasury Regulation §1.409A-3(i)(4) and authoritative guidance.

     ARTICLE V: RETIREMENT BENEFIT AND POST-RETIREMENT DEATH BENEFIT

     Upon the attainment of the Retirement Date, the Bank shall pay the Executive an annual benefit equal to sixty percent (60%) of the Executive’s average highest (3) years’ base salary during the term of the Executive’s employment with the Bank. Said benefit shall be paid in equal monthly installments (1/12^th of the annual benefit) until the Executive’s death. If the Executive dies prior to having received 240 such monthly installments, said installments shall continue to be paid the Executive’s Beneficiary for the remainder of the 240 month period.

     ARTICLE X: CHANGE OF CONTROL

     If the Executive subsequently suffers a Termination of Employment (voluntary or involuntary), except for cause, anytime subsequent to a Change of Control as defined in Subparagraph IV (H), then the Executive shall receive an annual benefit equal to sixty percent (60%) of the Executive’s average highest (3) years’ base salary during the term of the Executive’s employment with the Bank. Said benefit shall be paid in equal monthly installments (1/12^th of the annual benefit) for a total of 240 months. If the Executive dies prior to having received 240 such monthly installments, said installments shall continue to be paid the Executive’s Beneficiary for the remainder of the 240 month period.

     IN WITNESS OF THE ABOVE, the Bank and the Executive have executed this Amendment to the Agreement.

WITNESS:	FOR MOUNTAIN NATIONAL BANK:
Michael Patterson	/s/ Michael L. Brown
(name)	(signature of authorized officer of Plan Sponsor)
/s/ Michael Patterson	Michael L. Brown
(signature of witness)	(print name)
VP/HR	Executive Vice President
(title if any)	(title of signing officer)
	THE EXECUTIVE:
	/s/ Devon McKinzie
	(signature)
	Devon McKinzie
	(print name)

EX-21

EXHIBIT 21

Subsidiaries of the Company:

Mountain National Bank, a national banking association
MNB Capital Trust I, a Delaware statutory trust
MNB Capital Trust II, a Delaware statutory trust
MNB Holdings, Inc., a Tennessee corporation
MNB Investments, Inc., a Nevada corporation
MNB Real Estate, Inc., a Maryland corporation

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-128370 and 333-134440) and the Registration Statement on Form S-3 (No. 333-135730) of Mountain National Bancshares, Inc. of our report dated March 31, 2008 appearing in this Annual Report on Form 10-K of Mountain National Bancshares, Inc. for the year ended December 31, 2007.

/s/ Crowe Chizek and Company LLC

Brentwood, Tennessee
March 31, 2008

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Dwight B. Grizzell, certify that:

     1. I have reviewed this annual report on Form 10-K of Mountain National Bancshares, Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the

audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2008

/s/ Dwight B. Grizzell  

Dwight B. Grizzell 

President and Chief Executive Officer 

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Rick Hubbs, certify that:

     1. I have reviewed this annual report on Form 10-K of Mountain National Bancshares, Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the

audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting

Date: March 31, 2008

/s/ Richard A. Hubbs  

Richard A. Hubbs 

Senior Vice President and Chief Financial Officer 

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of Mountain National Bancshares, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2007 (the “Report”), I, Dwight B. Grizzell, Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 31, 2008	/s/ Dwight B. Grizzell
	Dwight B. Grizzell, Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of Mountain National Bancshares, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2007 (the “Report”), I, Rick Hubbs, Senior Vice President and Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 31, 2008	/s/ Richard A. Hubbs
	Richard A. Hubbs, Senior Vice President and
	Chief Financial Officer