UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 0-49912

MOUNTAIN NATIONAL BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Tennessee (State or other jurisdiction of incorporation or organization)		75-3036312 (I.R.S. Employer Identification No.)
300 East Main Street
Sevierville, Tennessee		37862
(Address of principal executive offices)		(Zip Code)

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

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has 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 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o      No 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.

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 Exchange Act).

Yes o      No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. Common stock outstanding: 2,631,611 shares as of November 1, 2009.

 

 

MOUNTAIN NATIONAL BANCSHARES, INC.
Quarterly Report on Form 10-Q
For the quarter ended September 30, 2009

Table of Contents

Item				Page
Number				Number
Part I — Financial Information
1.		Financial Statements (Unaudited)
		Consolidated Balance Sheets — September 30, 2009 and December 31, 2008			3
		Consolidated Statements of Operations — Three and nine months ended September 30, 2009 and 2008			4
		Consolidated Statements of Changes in Shareholders’ Equity — Nine months ended September 30, 2009 and 2008			5
		Consolidated Statements of Cash Flows — Nine months ended September 30, 2009 and 2008			6
		Notes to Consolidated Financial Statements			7
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
4.		Controls and Procedures			45
Part II — Other Information
1A.		Risk Factors			45
6.		Exhibits			52
		Signatures			53
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2009				2008
		(unaudited)
ASSETS
Cash and due from banks		$	10,341,870			$	14,013,675
Federal funds sold			3,093,916				576,000
Total cash and cash equivalents			13,435,786				14,589,675
Securities available for sale			154,773,046				124,578,359
Securities held to maturity, fair value $2,352,646 at September 30, 2009 and $1,813,410 at December 31, 2008			2,181,116				2,117,044
Restricted investments, at cost			3,812,450				3,862,518
Loans, net of allowance for loan losses of $8,561,584 at September 30, 2009 and $5,292,028 at December 31, 2008			404,594,059				415,137,230
Investment in partnership			4,125,427				4,117,962
Premises and equipment			33,871,409				31,484,233
Accrued interest receivable			3,136,794				2,737,819
Cash surrender value of life insurance			11,385,773				11,078,708
Other real estate owned			15,981,403				9,444,150
Other assets			3,669,457				2,225,501
Total assets		$	650,966,720			$	621,373,199
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand deposits		$	48,744,544			$	44,652,008
NOW accounts			86,908,593				110,420,061
Money market accounts			40,552,171				37,166,820
Savings accounts			17,517,025				15,977,609
Time deposits			302,658,786				246,449,448
Total deposits			496,381,119				454,665,946
Federal funds purchased			—				22,580,000
Securities sold under agreements to repurchase			2,300,299				4,331,865
Accrued interest payable			790,597				1,022,921
Subordinated debentures			13,403,000				13,403,000
Federal Reserve/Federal Home Loan Bank advances			82,900,000				72,900,000
Other liabilities			2,519,795				1,475,714
Total liabilities			598,294,810				570,379,446
Commitments and contingencies
Shareholders’ equity:
Common stock, $1.00 par value; 10,000,000 shares authorized; issued and outstanding 2,631,611 shares at September 30, 2009 and 2,631,611 shares at December 31, 2008			2,631,611				2,631,611
Additional paid-in capital			42,095,828				41,952,632
Retained earnings			6,122,575				6,557,097
Accumulated other comprehensive income (loss)			1,821,896				(147,587	)
Total shareholders’ equity			52,671,910				50,993,753
Total liabilities and shareholders’ equity		$	650,966,720			$	621,373,199

See accompanying Notes to Consolidated Financial Statements

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Nine months ended September 30,								Three months ended September 30,
		2009				2008				2009				2008
INTEREST INCOME
Loans		$	19,515,946			$	23,396,030			$	6,366,608			$	7,470,867
Taxable securities			4,037,795				3,099,685				1,238,403				1,183,901
Tax-exempt securities			842,834				551,268				329,576				203,143
Federal funds sold and deposits in other banks			16,895				46,761				5,916				17,305
Total interest income			24,413,470				27,093,744				7,940,503				8,875,216
INTEREST EXPENSE
Deposits			7,948,836				9,979,120				2,442,115				3,236,410
Federal funds purchased			34,829				243,199				3,938				78,107
Repurchase agreements			82,985				102,644				31,402				35,926
Federal Home Loan Bank advances			1,937,251				2,133,517				652,886				705,453
Subordinated debentures			310,150				541,308				90,197				164,433
Total interest expense			10,314,051				12,999,788				3,220,538				4,220,329
Net interest income			14,099,419				14,093,956				4,719,965				4,654,887
Provision for loan losses			5,802,395				1,075,000				621,647				550,000
Net interest income after provision for loan losses			8,297,024				13,018,956				4,098,318				4,104,887
NONINTEREST INCOME
Service charges on deposit accounts			1,802,669				1,068,247				607,309				363,346
Other fees and commissions			924,833				929,800				343,500				328,235
Gain on sale of mortgage loans			120,010				151,072				23,988				41,580
Investment gains and losses, net			1,360,957				139,117				1,463,551				105,411
Other noninterest income			116,046				520,540				(378,508	)			218,642
Total noninterest income			4,324,515				2,808,776				2,059,840				1,057,214
NONINTEREST EXPENSE
Salaries and employee benefits			7,251,939				7,349,390				2,498,818				2,406,529
Occupancy expenses			1,275,557				995,443				438,362				342,416
Other operating expenses			5,775,630				4,203,173				1,919,949				1,318,293
Total noninterest expense			14,303,126				12,548,006				4,857,129				4,067,238
Income (loss) before income taxes			(1,681,587	)			3,279,726				1,301,029				1,094,863
Income tax expense (benefit)			(1,247,065	)			691,805				272,867				226,659
Net income (loss)		$	(434,522	)		$	2,587,921			$	1,028,162			$	868,204
EARNINGS (LOSS) PER SHARE
Basic		$	(0.17	)		$	0.98			$	0.39			$	0.33
Diluted		$	(0.17	)		$	0.98			$	0.39			$	0.33

See accompanying Notes to Consolidated Financial Statements

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2009 and 2008

																		Accumulated
										Additional								Other				Total
		Comprehensive				Common				Paid-in				Retained				Comprehensive				Shareholders’
		Income				Stock				Capital				Earnings				Income/(Loss)				Equity
BALANCE, January 1, 2008						$	2,499,629			$	39,426,881			$	7,300,933			$	(278,990	)			48,948,453
Exercise of stock options, 14,237 shares							25,022				176,840												201,862
Share repurchase program, 4,598 shares							(16,598	)			(325,139	)											(341,737	)
5% stock dividend							124,718				2,868,514				(3,011,034	)							(17,802	)
Share-based compensation											86,000												86,000
Tax benefit from exercise of options											202,893												202,893
Comprehensive income:
Net income		$	2,587,921												2,587,921								2,587,921
Other comprehensive income, net of tax:
Unrealized holding loss on securities available for sale, net of reclassification adjustment			288,655				—				—				—				288,655				288,655
Total comprehensive income			2,876,576
BALANCE, September 30, 2008							2,632,771				42,435,989				6,877,820				9,665				51,956,245
BALANCE, January 1, 2009							2,631,611				41,952,632				6,557,097				(147,587	)			50,993,753
Share-based compensation											72,500												72,500
Tax benefit from exercise of options											70,696												70,696
Comprehensive income:
Net income (loss)			(434,522	)											(434,522	)							(434,522	)
Other comprehensive income, net of tax:
Unrealized holding gain on securities available for sale, net of reclassification adjustment			1,969,483				—				—				—				1,969,483				1,969,483
Total comprehensive loss		$	1,534,961
BALANCE, September 30, 2009						$	2,631,611			$	42,095,828			$	6,122,575			$	1,821,896			$	52,671,910

See accompanying Notes to Consolidated Financial Statements

MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine months ended September 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	(434,522	)		$	2,587,921
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation			1,049,619				902,428
Net realized gains on securities available for sale			(1,708,325	)			(139,117	)
Impairment of securities			347,368				—
Net amortization on securities			515,237				110,548
Activity in held-to-maturity securities:
Increase due to accretion			(64,072	)			(73,310	)
Provision for loan losses			5,802,395				1,075,000
Net (gain) loss on sale of other real estate			219,453				(64,737	)
Gross mortgage loans originated for sale			(16,752,865	)			(17,314,957	)
Gross proceeds from sale of mortgage loans			17,061,675				17,793,625
Gain on sale of mortgage loans			(120,010	)			(151,072	)
Increase in cash surrender value of life insurance			(307,065	)			(327,415	)
Investment in partnership			(7,465	)			(10,336	)
Share-based compensation			72,500				86,000
Tax benefit from exercise of options			(70,696	)			(202,893	)
Change in operating assets and liabilities:
Accrued interest receivable			(398,975	)			(575,796	)
Accrued interest payable			(232,324	)			(293,963	)
Other assets and liabilities			(1,798,367	)			1,160,961
Net cash provided by operating activities			3,173,561				4,562,887
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Proceeds from sales			59,525,776				13,506,765
Proceeds from maturities, prepayments and calls			98,246,813				25,059,855
Purchases			(184,979,705	)			(68,213,360	)
Purchases of other investments			(122,300	)			(172,450	)
Loan originations and principal collections, net			(9,529,926	)			(30,173,408	)
Purchase of premises and equipment			(3,436,795	)			(5,952,665	)
Purchase of life insurance			—				(2,000,000	)
Proceeds from sale of other real estate			8,794,384				311,363
Net cash used in investing activities			(31,501,753	)			(67,633,900	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits			41,715,173				42,436,353
Proceeds from Federal Reserve/Federal Home Loan Bank advances			31,000,000				17,000,000
Matured Federal Reserve/Federal Home Loan Bank advances			(21,000,000	)			(11,456,418	)
Net increase (decrease) in federal funds purchased			(22,580,000	)			13,800,000
Net decrease in securities sold under agreements to repurchase			(2,031,566	)			(592,103	)
Proceeds from issuance of common stock, including options			—				201,863
Tax benefit from exercise of options			70,696				202,893
Purchase of common stock			—				(341,737	)
Cash dividends			—				(17,802	)
Net cash provided by financing activities			27,174,303				61,233,049
NET DECREASE IN CASH AND CASH EQUIVALENTS			(1,153,889	)			(1,837,964	)
CASH AND CASH EQUIVALENTS, beginning of period			14,589,675				16,328,580
CASH AND CASH EQUIVALENTS, end of period		$	13,435,786			$	14,490,616
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest		$	10,546,375			$	13,293,751
Income taxes			455,000				1,000,000
Non-cash investing and financing activities:
Transfers from loans to other real estate owned			13,199,759				8,155,181

See accompanying Notes to Consolidated Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation and Accounting Policies

The unaudited consolidated financial statements in this report have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X. The consolidated financial statements include the accounts of Mountain National Bancshares, Inc., a Tennessee corporation (the “Company”), and its subsidiaries. The Company’s principal subsidiary is Mountain National Bank, a national association (the “Bank”). All material intercompany accounts and transactions have been eliminated in consolidation.

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.

Certain information and note disclosures normally included in the Company’s annual audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from the unaudited financial statements in this report. Consequently, the quarterly financial statements should be read in conjunction with the notes included herein and the notes to the audited financial statements presented in the Company’s 2008 Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The unaudited quarterly financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results of operations for interim periods presented. All such adjustments were of a normal, recurring nature. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the complete fiscal year.

Note 2. New Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 . This statement modifies the Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification (“ASC”), also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. FASB ASC 105-10 “Generally Accepted Accounting Principles” became applicable beginning in third quarter of 2009. All accounting references have been updated, and therefore SFAS references have been replaced with ASC references except for SFAS references that have not been integrated into the codification.

In June 2009, the FASB issued new guidance impacting FAS ASC 860, Transfers and Servicing, which provides for the removal of the qualifying special purpose entity (“QSPE”) concept from GAAP, resulting in the evaluation of all former QSPEs for consolidation on and after January 1, 2010. It also modifies the criteria for achieving sale accounting for transfers of financial assets and defines the term participating interest to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale, and provides that a transferor should recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. This guidance also requires enhanced disclosures which are generally consistent with, and supersede, the disclosures previously required, and is effective prospectively for new transfers of financial assets occurring in fiscal years beginning after November 15, 2009, and in interim periods within those fiscal years. The disclosure requirements should be applied to transfers that occurred both before and after its effective date, with comparative disclosures required only for periods subsequent to initial adoption for those disclosures not previously required under ASC 860-10-65-2. This statement is not expected to have a significant impact on the Company’s financial condition or results of operations.

In June 2009, the FASB issued new guidance impacting FASB ASC 810, which revises the criteria for determining the primary beneficiary of a variable interest entity (“VIE”) by replacing the prior quantitative-based risks and rewards test with a qualitative analysis. While this update retains the guidance that requires a reassessment of whether an entity is a VIE only when certain triggering events occur, it adds an additional criterion which triggers a reassessment of an entity’s status when an event occurs such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. Additionally, this new guidance requires continual reconsideration of conclusions regarding which interest holder is the VIE’s primary beneficiary, separate presentation on the face of the balance sheet of the assets of a consolidated VIE that can only be used to settle the VIE’s obligations and the liabilities of a consolidated VIE for which creditors or beneficial interest holders have no recourse to the general credit of the primary beneficiary, and enhanced disclosures which are generally consistent with, and supersede, the disclosures previously required. This update is effective for periods beginning after November 15, 2009, and requires reevaluation under its amended consolidation requirements as of the beginning of the first annual period that begins after November 15, 2009. If consolidation of a VIE is required upon initial adoption, the assets, liabilities, and noncontrolling interests of the VIE should be measured at their carrying amounts as if this guidance had been applied from inception of the VIE, with any difference between the net amounts recognized and the amount of any previously recognized interests reflected as a cumulative effect adjustment to undivided profits. However, if determining the carrying amounts is not practicable, the assets, liabilities, and noncontrolling interests of the VIE may be measured at fair value. Further, if determining the carrying amounts is not practicable, and if the activities of the VIE are primarily related to securitizations or other forms of asset-backed financings and the assets of the VIE can be used only to settle obligations of the entity, then the assets and liabilities of the VIE may be measured at their unpaid principal balances. The fair value option provided under FASB ASC 825 may also be elected for financial assets and financial liabilities requiring consolidation as a result of initial adoption, provided that the election is made for all eligible financial assets and financial liabilities of the VIE. If initial application of this new guidance results in deconsolidation of a VIE, any retained interest in the VIE should be measured at its carrying value as if it had been applied from inception of the VIE. Comparative disclosures are required only for periods subsequent to initial adoption for those disclosures not previously required under ASC 860-10-65-2. This statement is not expected to have a significant impact on the Company’s financial condition or results of operations.

In April 2009, the FASB issued an update to FASB ASC 820, Fair Value Measurements and Disclosures. FASB ASC 820-10-65-4 provides additional guidance for estimating fair value in accordance with FASB ASC 820 when the volume and level of activity for the asset or liability have decreased significantly. FASB ASC 820-10-65-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. These provisions were effective April 1, 2009. There was no impact as a result of adopting this standard.

In April 2009, the FASB issued an update to FASB ASC 825, Financial Instruments, which requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. These provisions were effective April 1, 2009. As it amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption had no impact on the Company’s financial condition or results of operations.

We adopted the updated provisions of FASB ASC 855, Subsequent Events, during the period ended June 30, 2009. FASB ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company has included required disclosures in our financial statements.

In April 2009, the FASB issued an update to ASC 320, Investments — Debt and Equity Securities, that amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This update does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The updated provisions of FASB ASC 320-10-65-1 were effective for the Company’s interim period ending on June 30, 2009. There was no impact from the adoption of this update on the Company’s financial position, results of operations or cash flows.

In August 2009, the FASB issued guidance impacting FASB ASC 820, Fair Value Measurements and Disclosures. The update is effective for the first reporting period including interim periods after the issuance. The update reduces potential ambiguity in financial reporting when measuring the fair value of liabilities by providing clarification for circumstances in which quoted prices in an active market for the identical liability is not available. A reporting entity is required to measure fair value using one or more of the following techniques: A valuation technique that uses the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as an asset. Another valuation technique consistent with the principals of FASB ASC 820 would be an income approach such as a present value technique or a market approach based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

Note 3. Investment Securities

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at September 30, 2009 and December 31, 2008 and the corresponding amounts of unrealized gains and losses therein.

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
September 30, 2009
Available-for-sale
U. S. Government securities		$	250,422			$	349			$	—			$	250,771
U. S. Government sponsored entities and agencies			24,324,669				331				(36,250	)			24,288,750
Obligations of states and political subdivisions			20,788,144				858,531				(45,939	)			21,600,736
Mortgage-backed securities-residential			106,495,618				2,139,056				(1,885	)			108,632,789
Total available-for-sale securities		$	151,858,853			$	2,998,267			$	(84,074	)		$	154,773,046
Held-to-maturity
Obligations of states and political subdivisions		$	2,181,116			$	174,773			$	(3,243	)		$	2,352,646

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
December 31, 2008
Available-for-sale
U. S. Government securities		$	254,253			$	2,545			$	—			$	256,798
U. S. Government sponsored entities and agencies			5,453,229				42,086				—				5,495,315
Obligations of states and political subdivisions			22,224,441				21,075				(1,638,780	)			20,606,736
Corporate securities			175,000				—				(60,147	)			114,853
Mortgage-backed securities-residential			96,720,773				1,435,106				(51,222	)			98,104,657
Total available-for-sale securities		$	124,827,696			$	1,500,812			$	(1,750,149	)		$	124,578,359
Held-to-maturity
Obligations of states and political subdivisions		$	2,117,044			$	—			$	(303,634	)		$	1,813,410

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

		September 30, 2009
		Amortized				Fair
		Cost				Value
Maturity
Available-for-sale
Within one year		$	20,575,091			$	20,575,771
One to five years			—				—
Five to ten years			5,398,446				5,610,701
Beyond ten years			19,389,698				19,953,785
Mortgage-backed securities-residential			106,495,618				108,632,789
Total		$	151,858,853			$	154,773,046
Held-to-maturity
Five to ten years			681,682				733,610
Beyond ten years			1,499,434				1,619,036
Total		$	2,181,116			$	2,352,646

The following table summarizes the investment securities with unrealized losses at September 30, 2009 and December 31, 2008 by aggregated major security type and length of time in a continuous unrealized loss position.

		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
September 30, 2009
Available-for-sale
U. S. Government agencies		$	3,963,750			$	(36,250	)		$	—			$	—			$	3,963,750			$	(36,250	)
Obligations of states and political subdivisions			1,270,372				(45,939	)			—				—				1,270,372				(45,939	)
Mortgage-backed securities-residential			32,857				(1,885	)			—				—				32,857				(1,885	)
Total available-for-sale		$	5,266,979			$	(84,074	)		$	—			$	—			$	5,266,979			$	(84,074	)
Held-to-maturity
Obligations of states and political subdivisions		$	432,380			$	(3,243	)		$	—			$	—			$	432,380			$	(3,243	)

		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
December 31, 2008
Available-for-sale
Obligations of states and political subdivisions		$	17,276,238			$	(1,559,745	)		$	566,900			$	(79,036	)		$	17,843,138			$	(1,638,781	)
Corporate securities			114,853				(60,147	)			—				—				114,853				(60,147	)
Mortgage-backed securities-residential			6,008,515				(37,907	)			3,781,650				(13,314	)			9,790,165				(51,221	)
Total available-for-sale		$	23,399,606			$	(1,657,799	)		$	4,348,550			$	(92,350	)		$	27,748,156			$	(1,750,149	)
Held-to-maturity
Obligations of states and political subdivisions		$	1,395,170			$	(228,034	)		$	418,240			$	(75,600	)		$	1,813,410			$	(303,634	)

Proceeds from sales of securities available for sale were approximately $58 million and $13 million for the nine months ended September 30, 2009 and 2008, respectively. Gross gains of $1,708,325 and $139,225 and gross losses of $0 and $108 were realized on these sales during 2009 and 2008, respectively. Net investment gains and losses for the nine months ending September 30, 2009 also includes losses recorded of $347,368 related to impairment of common stock held by the Bank and issued by Silverton Financial Services, Inc. (“Silverton”) and trust preferred securities held by the Bank and issued by a trust affiliated with Silverton which are guaranteed by Silverton.

Proceeds from sales of securities available for sale were approximately $44 million and $7 million for the three months ended September 30, 2009 and 2008, respectively. Gross gains of $1,463,551 and $105,411 and gross losses of $0 and $0 were realized on these sales during 2009 and 2008, respectively.

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under the provisions of ASC 320-10, Investments — Debt and Equity Securities. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of September 30, 2009, the Company’s security portfolio consisted of 174 securities, 7 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s obligations of states and political subdivisions and U.S. Government agency securities, as discussed below.

Unrealized losses on obligations of states and political subdivisions and U.S. Government agency securities have not been recognized into income because the issuer(s)’ bonds are of high credit quality, the decline in fair value is largely due to changes in interest rates and other market conditions, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2009.

Other Securities

On May 1, 2009, Silverton’s bank subsidiary, Silverton Bank, was placed into receivership by the Office of the Comptroller of the Currency after Silverton Bank’s capital deteriorated significantly in the first quarter of 2009, and on June 5, 2009 Silverton filed a petition for bankruptcy. The Company does not anticipate that it will recover any of the Bank’s investment in either the common securities or trust preferred securities issued by Silverton or its affiliated trust. As a result, the Company recorded an impairment charge of $347,368, which represents the Company’s full investment in the securities, during the first quarter of 2009.

Note 4. Common Stock Activity and Stock Options

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. On July 7, 2008, the Company announced the first expansion of this share repurchase plan. Under the expansion, an additional $300,000 in repurchases of Company common stock was approved, over and above the initial $500,000 authorization. On October 24, 2008, the Company announced a second expansion of the share repurchase program. The second expansion authorizes the repurchase of an additional $700,000 of Company common stock, bringing the total amount of the repurchase plan including all expansions to $1,500,000. The expiration date of the ongoing repurchase plan was extended to June 27, 2009. However, during the fourth quarter of 2008, the authorized repurchase amount was exhausted.

Note 5. Net Earnings (Loss) Per Common Share

Net earnings (loss) per common share are based on the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the effects of potential common shares outstanding, including shares issuable upon the exercise of options for which the exercise price is lower than the market price of the common stock, during the period.

The following is a summary of the basic and diluted earnings (loss) per share calculation for the three and nine months ended September 30, 2009 and 2008:

		Nine-Months Ended								Three-Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Basic earnings (loss) per share calculation:
Numerator — Net income (loss)			(434,522	)			2,587,921				1,028,162				868,204
Denominator — Average common shares outstanding			2,631,611				2,633,310				2,631,611				2,637,622
Basic net income (loss) per share		$	(0.17	)		$	0.98			$	0.39			$	0.33

		Nine-Months Ended								Three-Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Diluted earnings (loss) per share calculation:
Numerator — Net income (loss)			(434,522	)			2,587,921				1,028,162				868,204
Denominator — Average common shares outstanding			2,631,611				2,633,310				2,631,611				2,637,622
Dilutive shares contingently issuable			—				24,861				—				20,856
Average dilutive common shares outstanding			2,631,611				2,658,171				2,631,611				2,658,478
Diluted net income (loss) per share		$	(0.17	)		$	0.98			$	0.39			$	0.33

During the three and nine months ended September 30, 2008, there were options for the purchase of 56,018 and 55,741 shares, respectively, outstanding during each time period that were antidilutive. These shares were accordingly excluded from the calculations above.

During the three months ended September 30, 2009, there were options for the purchase of 130,193 shares that were antidilutive and excluded from the calculations above.

Potential common shares that would have the effect of decreasing diluted loss per share are considered to be antidilutive and therefore not included in calculating diluted loss per share. During the nine months ended September 30, 2009, there were 24,421 shares excluded from this calculation although the exercise price for such shares’ underlying options was less than the fair value of the Company’s common stock.

Note 6. Loans and Allowance for Loan Losses

At September 30, 2009 and December 31, 2008, the Bank’s loans consisted of the following (in thousands):

		September 30,				December 31,
		2009				2008
Mortgage loans on real estate:
Residential 1-4 family		$	91,950			$	75,921
Residential multifamily			7,278				6,588
Commercial real estate			125,396				113,734
Construction and land development			112,590				142,370
Second mortgages			7,156				6,059
Equity lines of credit			28,787				29,697
			373,157				374,369
Commercial loans			33,100				37,632
Consumer installment loans:
Personal			4,555				6,233
Credit cards			2,344				2,195
			6,899				8,428
Total Loans			413,156				420,429
Less: Allowance for loan losses			(8,562	)			(5,292	)
Loans, net		$	404,594			$	415,137

Loans held for sale at September 30, 2009 and December 31, 2008 were $0 and $188,800, respectively. These loans are included in residential 1-4 family loans in the table above.

Individually impaired loans at September 30, 2009 and December 31, 2008 were as follows (in thousands):

		September 30,				December 31,
		2009				2008
Period-end loans with allocated allowance for loan losses		$	41,464			$	2,808
Period-end loans with no allocated allowance for loan losses			16,936				539
Allowance for loan losses on impaired loans			2,759				561

Troubled debt restructures (“TDRs”) at September 30, 2009 totaled approximately $31,608,000 which is 54.1% of total impaired loans. The TDRs related primarily to construction and development loans totaling approximately $11,030,000, or 18.9% of impaired loans, 1-4 family residential loans totaling approximately $10,850,000, or 18.6% of impaired loans, and commercial real estate loans totaling approximately $8,687,000, or 14.9% of impaired loans. The TDRs are due to lack of real estate sales and weak or insufficient cash flows of the guarantors of the loans due to the current economic climate. The majority of the TDRs are for a limited term, in most instances, of one to two years, and include an interest rate reduction during this term.

Nonperforming loans as of September 30, 2009 and December 31, 2008 were as follows (in thousands):

		September 30,				December 31,
		2009				2008
Loans past due over 90 days still on accrual		$	2,159			$	128
Nonaccrual loans			21,600				11,711

A summary of transactions in the allowance for loan losses (“AFLL”) for the nine months ended September 30, 2009 and 2008 is as follows (in thousands):

		Nine Months Ended
		September 30,
		2009				2008
ALLL
Balance, beginning of year		$	5,292			$	3,974
Loans charged off			(2,805	)			(702	)
Recoveries of loans previously charged off			273				50
Provision for loan losses			5,802				1,075
Balance, end of period		$	8,562			$	4,397

Note 7. Comprehensive Income (Loss)

Comprehensive income (loss) is made up of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) is made up of changes in the unrealized gain (loss) on securities available for sale. Comprehensive income for the three and nine months ended September 30, 2009 was $2,176,562 and $1,534,961, respectively, as compared to $2,046,084 and $2,876,576, respectively, for the three and nine months ended September 30, 2008.

Note 8. Fair Value

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Investment Securities Available for Sale — Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent service provider. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the securities’ terms and conditions, among other things.

Impaired Loans — Impaired loans are measured based on the present value of expected payments using the loan’s original effective interest rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in an impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses or the expense is recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy.

Other Real Estate — The fair value of other real estate is generally based on current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the value are recorded as a gain or loss on other real estate.

Assets and Liabilities Measured on a Recurring Basis

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

						Fair Value Measurements at
						September 30, 2009 Using:
						Significant Other
						Observable Inputs
		Carrying Value				(Level 2)
Assets:
Available for sale securities:
U. S. Government securities		$	250,771			$	250,771
U. S. Government sponsored entities and agencies			24,288,750				24,288,750
Obligations of states and political subdivisions			21,600,736				21,600,736
Mortgage-backed securities-residential			108,632,789				108,632,789
Total available for sale securities		$	154,773,046			$	154,773,046

						Fair Value Measurements at
						December 31, 2008 Using:
						Significant Other
						Observable Inputs
		Carrying Value				(Level 2)
Assets:
Available for sale securities		$	124,578,359			$	124,578,359

Assets and Liabilities Measured on a Non-Recurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table summarizes assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2009 and December 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

						Fair Value Measurements at
						September 30, 2009 Using:
						Significant
						Unobservable Inputs
		Carrying Value				(Level 3)
Assets:
Impaired Loans		$	38,704,972			$	38,704,972
Other real estate			15,731,403				15,731,403
Total Assets Measured at Fair Value on a Non-Recurring Basis		$	54,436,375			$	54,436,375

						Fair Value Measurements at
						December 31, 2008 Using:
						Significant
						Unobservable Inputs
		Carrying Value				(Level 3)
Assets:
Impaired Loans		$	2,246,312			$	2,246,312

At September 30, 2009, impaired loans, which are measured for impairment using the present value of expected future cash flows or the fair value of collateral for collateral dependent loans, had a carrying amount of $41,463,744, with a valuation allowance of $2,758,772 resulting in an additional provision for loan losses of $2,658,772 for the nine month period ended September 30, 2009. During the three months ended September 30, 2009, an additional $482,579 was charged to provision for loan losses for impaired loans. At December 31, 2008, impaired loans had a carrying amount of $2,807,562, with a valuation allowance of $561,250 resulting in an additional provision for loan losses of $561,250 for the year ended December 31, 2008.

The September 30, 2009 carrying amount of other real estate includes net valuation adjustments of approximately ($386,000) and $182,000, respectively, for the three and nine months ended September 30, 2009. These valuation adjustments are charged to gain or loss on other real estate. The fair value of other real estate is based upon appraisals performed by qualified, licensed appraisers.

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 as previously described for securities available for sale, and in a similar manner for securities held to maturity.

Restricted investments:

Restricted investments consist of Federal Home Loan Bank and Federal Reserve Bank stock. It is not practicable to determine the fair value due to restrictions placed on the transferability of the stock.

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.

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 most recent offering rates available 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.

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 amounts and estimated fair values of the Company’s financial instruments at September 30, 2009 and December 31, 2008, not previously presented, are as follows (in thousands):

		September 30, 2009								December 31, 2008
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
Assets:
Cash and cash equivalents		$	13,436			$	13,436			$	14,590			$	14,590
Investment securities held to maturity			2,181				2,353				2,117				1,813
Restricted investments			3,812				N/A				3,863				N/A
Loans, net			365,889				366,056				412,891				415,723
Accrued interest receivable			3,137				3,137				2,738				2,738
Liabilities:
Noninterest-bearing demand deposits		$	48,745			$	48,745			$	44,652			$	44,652
NOW accounts			86,909				86,909				110,420				110,420
Savings and money market accounts			58,069				58,069				53,144				53,144
Time deposits			302,659				304,040				246,449				248,356
Subordinated debentures			13,403				7,182				13,403				10,582
Federal funds purchased and securities sold under agreements to repurchase			2,300				2,300				26,912				26,912
Federal Reserve/Federal Home Loan Bank advances			82,900				88,815				72,900				80,517
Accrued interest payable			791				791				1,023				1,023