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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2010

OR

For transition period from             to             

Commission file number 000-22473

VOLUNTEER BANCORP, INC.

(Name of small business issuer in its charter)

(Exact Name of Registrant as Specified in its Charter)

210 East Main Street

Rogersville, TN 37857

(Address of principal executive offices)(Zip Code)

(423) 272-2200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value

Indicate by check mark if Registrant is a well known seasoned issuer, as defined in Rule 405 of the of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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 and 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  ¨    No  x

Indicate by check whether the Registrant has submitted electronically and posted on its corporate Website, 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  ¨    No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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.  x

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.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

The aggregate market value of the common stock held by non-affiliates of the Registrant on June 30, 2010 was $3.6 million. The market value calculation was determined using the price of last known trade of the Registrant’s common stock as discussed further in Item 5. For purposes of this calculation, the term “affiliate” refers to all directors, executive officers and 5% shareholders of the Registrant. As of the close of business on December 31, 2010, there were 496,277 shares of the Registrant’s common stock outstanding.

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VOLUNTEER BANCORP, INC.

FORM 10-K INDEX

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Cautionary Notice Regarding Forward-Looking Statements

We may from time to time make written or oral statements, including statements contained in this report, which may constitute forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. Certain statements contained in this annual report on Form 10-K (this “Form 10-K”) that are not statements of historical fact such as “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such forward-looking statements are made pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve significant risks and uncertainties that could cause the actual results to differ materially from those anticipated in such statements. Most of these factors are outside our control and difficult to predict. These forward-looking statements include, without limitation, our expectations with respect to our future financial or business performance, strategies or expectations. Factors that may cause such differences include, but are not limited to:

We caution that the foregoing list of factors is not exclusive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. You should review carefully the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K for a more complete discussion of these and other factors that may affect our business. All subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-K, except to the extent required by federal securities laws.

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PART I

THE COMPANY

Volunteer Bancorp, Inc. (“Volunteer” or “Company”) is a registered bank holding company organized under the laws of Tennessee, chartered in 1985. Volunteer, with consolidated total assets of approximately $132.9 million at December 31, 2010, is headquartered in Rogersville, Tennessee with offices in Church Hill and Sneedville, Tennessee, and we conduct operations through our subsidiary, The Citizens Bank of East Tennessee (“Bank”), a state bank organized under the laws of the state of Tennessee in April 1906. We do not engage in any activities other than acting as a bank holding company for the Bank. We believe we can present an alternative to mega banks by offering local ownership, local decision making and other personalized service characteristics of community banks. The holding company structure provides flexibility for expansion of our banking business through acquisition of other financial institutions and provision of additional banking-related services which the traditional commercial bank may not provide under present laws.

From April 24, 1997 (the date we registered our common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”)) to December 3, 2004 (the date we filed Form 15 to terminate such registration) we filed with the United States Securities and Exchange Commission (“SEC”) our periodic reports pursuant to the Exchange Act. In December of 2004, we filed a Form 15, based on our belief that it satisfied the requirements under Rule 12g-4 to terminate the registration of the common stock, and thereby suspend our duty to file reports pursuant to the Exchange Act. In 2011, we discovered that the filing of the Form 15 was in error; that we remained subject to the reporting requirements under the Exchange Act. In connection with such requirements, we are filing this Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and intend to file our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, and our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and to continue to make timely filing of our periodic reports thereafter, as required by the Exchange Act.

SERVICES

The Bank provides a full range of retail banking services, including (i) the acceptance of demand, savings and time deposits; (ii) the making of loans to consumers, businesses and other institutions; (iii) the investment of excess funds in the sale of federal funds, U.S. government and agency obligations, and state, county and municipal bonds; and (iv) other miscellaneous financial services usually handled for customers by commercial banks.

MARKET AREA AND COMPETITION

We compete with other commercial banks, savings and loan associations, credit unions and finance companies operating in Hancock and Hawkins counties in Tennessee and elsewhere. One other commercial bank is doing business in Hancock County, and in Hawkins County there are eight commercial banks and savings and loan associations. The Bank is subject to substantial competition in all aspects of its business. Intense competition for loans and deposits comes from other financial institutions in the market area. In certain aspects of its business, the Bank also competes with credit unions, small loan companies, insurance companies, mortgage companies, finance companies, brokerage houses and other financial institutions, some of which are not subject to the same degree of regulation and restriction as the Bank and some of which have financial resources greater than those of the Bank. The future success of the Bank will depend primarily upon the difference between the cost of its borrowing (primarily interest paid on deposits) and income from operations (primarily interest or fees earned on loans, sales of loans and investments). The Bank competes for funds with other institutions, which, in most cases, are significantly larger and are able to provide a greater variety of services than the Bank and thus may obtain deposits at lower rates of interest.

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AVERAGE BALANCE SHEETS AND INTEREST RATES

The following table sets forth weighted average yields earned by Volunteer on our earning assets and the weighted average rates paid on our average deposits and other interest-bearing liabilities for the years indicated, and certain other information:

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The following table presents a summary of changes in interest income, interest expense, and the interest rate differential aggregated by the changes in volumes and rates:

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LIABILITY AND ASSET MANAGEMENT

The Bank’s Funds Management Committee actively measures and manages interest rate risk using a process developed by the Company. The committee is also responsible for implementing our asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing our interest rate sensitivity position.

The primary tool that management uses to measure short-term interest rate risk is a net interest income simulation model prepared by an independent correspondent institution. These simulations estimate the impact that various changes in the overall level of interest rates over one and two-year time horizons would have on net interest income. The results help us develop strategies for managing exposures to interest rate risk.

Like any forecasting technique, interest rate simulation modeling is based on a large number of assumptions. In this case, the assumptions relate primarily to loan and deposit growth, asset and liability prepayments, interest rates and balance sheet management strategies. We believe that both individually and in the aggregate the assumptions are reasonable. Nevertheless, the simulation modeling process produces only a sophisticated estimate, not a precise calculation of exposure.

At December 31, 2010, approximately 74% of our gross loans had fixed rates. Based on the asset/liability modeling we believe that these loans reprice at a slower pace than our liabilities. Because the majority of our liabilities mature in 12 months and under and the gap in repricing is liability sensitive, with liabilities repricing more frequently, we believe that a rising rate environment will have a negative impact on our net interest margin.

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DEPOSITS

Our primary source of funds is interest-bearing deposits. The following table sets forth our deposit structure at December 31, 2010 and 2009.

* Interest Bearing Deposits include $10,754 in Individual Retirement Accounts for 2010 and $11,214 in 2009.

The table below presents the Bank’s average balances of deposits and the average rates paid on those deposits for the years ended December 31, 2010 and 2009.

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At December 31, 2010, time deposits greater than $100,000 totaled approximately $31.4 million. The following table indicates, as of December 31, 2010, the dollar amount of $100,000 or more deposits by time remaining until maturity:

SHORT-TERM BORROWINGS

Short-term borrowings are primarily comprised of borrowings with the Federal Home Loan Bank of Cincinnati (“FHLB”). Other short-term borrowings within the Company are insignificant.

The balances at year-end are shown:

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ASSETS

Our management considers many criteria in managing assets, including creditworthiness, diversification and structural characteristics, maturity and interest rate sensitivity. The following table sets forth our interest earning assets by category at December 31, 2010 and 2009.

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INVESTMENT PORTFOLIO

At year end 2010, obligations of the United States Government or its agencies and obligations of states and political subdivisions represented 100.00% of the investment portfolio.

The securities portfolio consists of two major components, securities held-to-maturity and securities available-for-sale. Securities are classified as held-to-maturity based on the intent and ability of our management, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost. Securities that may be sold in response to changes in market interest rates, changes in securities’ prepayment risk, increases in loan demand, general liquidity needs, and other similar factors are classified as available-for-sale and are carried at estimated fair value. The table below summarizes our securities portfolio.

The following table presents the maturity distribution of Volunteer’s debt securities at December 31, 2010. The weighted average yields on these instruments are presented based on final maturity. Yields on states and political subdivisions have been adjusted to a fully-taxable equivalent basis. Since we have recorded a full valuation allowance on our deferred tax assets, the yield and tax equivalent yield are the same.

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INVESTMENT POLICY

The objective of our investment policy is to invest funds not otherwise needed to meet the loan demand of our market area to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. In doing so, we balance the market and credit risks against the potential investment return, make investments compatible with the pledge requirements of our deposits of public funds, maintain compliance with regulatory investment requirements, and assist the various public entities with their financing needs. The Chief Executive Officer is authorized to execute security transactions for the investment portfolio based on the decisions of the Funds Management Committee. The Funds Management Committee, which consists of the President and Chief Executive Officer, the Chief Financial Officer, and various outside Directors, has full authority over the investment portfolio and makes decisions on purchases and sales of securities. All the investment transactions occurring since the previous Board of Directors’ meeting are reviewed by the board at its next monthly meeting, and the entire portfolio is reviewed on a semi-annual basis. The investment policy allows portfolio holdings to include short-term securities purchased to provide Volunteer needed liquidity and longer term securities purchased to generate level income for us over periods of interest rate fluctuations.

Our investment securities portfolio of $12,740,039 at December 31, 2010, consisted of $55,933 of securities held to maturity, which are carried at amortized cost and $12,684,106 of securities available for sale which are carried at fair value. In addition, unrealized gains on investment securities available for sale were $452,590 and unrealized losses were $34,199. Our investment securities portfolio of $14,681,073 at December 31, 2009, consisted of $92,528 of securities held to maturity, which are carried at amortized cost and $14,588,545 of securities available for sale which are carried at fair value. In addition, unrealized gains on investment securities available for sale were $633,889 and unrealized losses were $22,743.

As reflected in Note 3 to Consolidated Financial Statements, the investment securities held to maturity had unrealized gains of $2,953 at December 31, 2010, compared to $2,834 unrealized gains at December 31, 2009.

LOAN PORTFOLIO

Total loans of $105,430,000 at December 31, 2010, reflected a decrease of $10,141,000 compared to total loans for the year ended December 31, 2009. Residential real estate loans, which historically generated low losses, decreased $2,946,000 or 5.39%. Construction and land development loans, loans secured by farmland and commercial real estate loans decreased by $7,193,000 or 13.77%. Commercial and industrial loans increased by $343,000 or 7.54%. These types of loans carry a higher level of risk in that the borrowers’ ability to repay may be affected by local economic trends. Installment and other consumer loans decreased by $346,000 or 8.29%. These loans, generally secured by automobiles and other consumer goods, contain a historically higher level of risk; however, this risk is mitigated by the fact that these loans generally consist of small individual balances. As the loan portfolio is concentrated in Hawkins and surrounding counties, there is a risk that the borrowers’ ability to repay the loans could be affected by changes in local economic conditions.

The following table sets forth the composition of our loan portfolio as December 31, 2010 and 2009.

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The following table sets forth the maturities of the loan portfolio at December 31, 2010:

The sensitivity to interest rate changes of that portion of Volunteer’s loan portfolio that matures after one year is set forth below:

LOAN POLICY

Lending activities are under the direct supervision and control of the Executive Vice President and the Board loan committee, which consists of eight directors. The loan committee enforces loan authorizations for each officer, decides on loans exceeding such limits, services all requests for officer credits to the extent allowable under current laws and regulations, administers all problem credits, and determines the allocation of funds for each lending division. The loan portfolio consists primarily of real estate, commercial, farming and installment loans. Commercial loans consist of either real estate loans or term loans. Maturity of term loans is normally limited to five to seven years. Conventional real estate loans may be made up to 90% of the appraised value or purchase cost of the real estate for no more than a thirty-year term. Installment loans are based on the earning capacity and vocational stability of the borrower.

The Board of Directors at its regularly scheduled meetings reviews all new loans in excess of $100,000 made the preceding month. Loans that are 30 days or more past due are reviewed monthly.

Management periodically reviews the loan portfolio, particularly nonaccrual and renegotiated loans. The review may result in a determination that a loan should be placed on a nonaccrual status for income recognition. In addition, to the extent that management identifies potential losses in the loan portfolio, it reduces the book value of such loans, through charge-offs, to their estimated collectible value. Our policy is to classify as nonaccrual any loan on which payment of principal or interest is 90 days or more past due except where there is adequate collateral to cover principal and accrued interest and the loan is in the process of collection. No concessions are granted and late fees are collected. In addition, a loan will be classified as nonaccrual if, in the opinion of our management, based upon a review of the borrower’s or guarantor’s financial condition, collateral value or other factors, payment is questionable, even though payments are not 90 days or more past due.

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When a loan is classified as nonaccrual, any unpaid interest is reversed against current income. Interest is included in income thereafter only to the extent received in cash. The loan remains in a nonaccrual classification until such time as the loan is brought current, when it may be returned to accrual classification. When principal or interest on a nonaccrual loan is brought current, if in management’s opinion future payments are questionable, the loan would remain classified as nonaccrual. After a nonaccrual or renegotiated loan is charged off, any subsequent payments of either interest or principal are applied first to any remaining balance outstanding, then to recoveries and lastly to income.

The large number of consumer installment loans and the relatively small dollar amount of each makes an individual review impracticable. It is our policy to charge off any consumer installment loan which is past due 90 days or more.

In addition, mortgage loans secured by real estate may be placed on nonaccrual status when the mortgagor is in bankruptcy or foreclosure proceedings are instituted. Any accrued interest receivable remains an obligation of the borrower, except in those cases where the loan to value ratio is more than adequate to recover accrued principal and interest.

Our underwriting guidelines are applied to four major categories of loans; commercial and industrial, consumer, agricultural and real estate which include residential, construction and development and certain other real estate loans. We require our loan officers and loan committee to consider the borrower’s character, the borrower’s financial condition as reflected in current financial statements, the borrower’s management capability, the borrower’s industry and the economic environment in which the loan will be repaid. Before approving a loan, the loan officer or committee must determine that the borrower is basically creditworthy, determine that the borrower is a capable manager, understand the specific purpose of the loan, understand the source and plan of repayment, determine that the purpose, plan and source of repayment as well as collateral are acceptable, reasonable and practical given the normal framework within which the borrower operates.

CREDIT RISK MANAGEMENT AND ALLOWANCE FOR LOAN LOSSES

Credit risk and exposure to loss are inherent parts of the banking business. Management seeks to manage and minimize these risks through its loan and investment policies and loan review procedures. Management establishes and continually reviews lending and investment criteria and approval procedures that it believes reflect the risk sensitive nature of Volunteer. The loan review procedures are set to monitor adherence to the established criteria and to ensure that on a continuing basis such standards are enforced and maintained.

Management’s objective in establishing lending and investment standards is to manage the risk of loss and provide for income generation through pricing policies. To effectuate this policy, we make commercial real estate and farming loans with one year or less fixed maturity.

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The loan portfolio is regularly reviewed and management determines the amount of loans to be charged off. In addition, such factors as our previous loan loss experience, prevailing and anticipated economic conditions, industry concentrations and the overall quality of the loan portfolio are considered. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for losses on loans and real estate owned. Such agencies may require us to recognize additions to the allowance based on their judgments about information available at the time of their examinations. In addition, any loan or portion thereof which is classified as a “loss” by regulatory examiners is charged off.

The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The general component of the allowance for loan losses, meaning that portion of the allowance that is not reserved for a specific customer loan, covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

The allowance for loan losses was $3,723,339 at December 31, 2010, or 3.53% of loans outstanding, net of unearned income, compared to $3,032,107 or 2.62% at December 31, 2009.

For additional information, see Note 1 to Notes to Consolidated Financial Statements.

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ALLOWANCE FOR LOAN LOSSES

The following table presents the activity in our allowance for loan losses for the dates indicated.

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At December 31, 2010 and 2009, the allowance for loan losses was allocated as follows:

The allocation of the allowance is presented based in part on evaluations of past history and composition of the loan portfolio. Since these factors are subject to change, the current allocation of the allowance is not necessarily indicative of the breakdown of future losses.

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The following table sets forth information with respect to nonperforming loans of Volunteer for the dates indicated. Accrual of interest is discontinued when there is reasonable doubt as to the full, timely collections of interest or principal. When a loan becomes contractually past due 90 days with respect to interest or principal, it is reviewed and a determination is made as to whether it should be placed on nonaccrual status. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to principal and interest and when, in the judgment of management, the loans are estimated to be fully collectible as to principal and interest. Restructured loans are those loans on which concessions in terms have been granted because of a borrower’s financial difficulty. Interest is generally accrued on such loans in accordance with the new terms.

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time and due to inflation. The impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.

CAPITAL ADEQUACY

Capital adequacy refers to the level of capital required to sustain asset growth over time and to absorb losses. The objective of our management is to maintain a level of capitalization that is sufficient to take advantage of profitable growth opportunities while meeting regulatory requirements. This is achieved by improving profitability through effectively allocating resources to more profitable businesses, improving asset quality, strengthening service quality, and streamlining costs.

The Federal Reserve Board has adopted capital guidelines governing the activities of bank holding companies. These guidelines require the maintenance of an amount of capital based on risk-adjusted assets so that categories of assets with potentially higher credit risk will require more capital backing than assets with lower risk. In addition, banks and bank holding companies are required to maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as loan commitments.

The capital guidelines classify capital into two tiers, referred to as Tier 1 and Tier 2. Under risk-based capital requirements, total capital consists of Tier 1 capital which is generally common stockholders’ equity less goodwill and Tier 2 capital which is primarily a portion of the allowance for loan losses and certain qualifying debt instruments. In determining risk-based capital requirements, assets are assigned risk-weights of 0% to 100%, depending primarily on the regulatory assigned levels of credit risk associated with such assets. The Bank’s off-balance sheet items are considered in the calculation of risk-adjusted assets through conversion factors established by the regulators. The framework for calculating risk-based capital requires banks and bank holding companies to meet the regulatory minimums of 4% Tier 1 and 8% total risk-based capital. In 1990, regulators added a leveraged computation to the capital requirements, comparing Tier 1 capital to total average assets less goodwill.

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Our consolidated capital ratios are set forth in Management’s Discussion and Analysis. See Note 16 to the Notes to Consolidated Financial Statements for Bank-only capital ratios.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established five capital categories for banks and bank holding companies. The bank regulators adopted regulations defining these five capital categories in September 1992. Under these new regulations each bank is classified into one of the five categories based on its level of risk-based capital as measured by Tier 1 capital, total risk-based capital, and Tier 1 leverage ratios and its supervisory ratings.

The following table lists the five categories of capital and each of the minimum requirements for the three risk-based capital ratios.

The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal banking agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. For example, pursuant to the terms of the Consent Order discussed below, the Bank is required to develop and implement a capital plan that increases and maintains the Bank’s Tier 1 capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio to 8%, 10%, and 12%, respectively.

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SUPERVISION AND REGULATION

General

Volunteer is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is registered with and regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Volunteer is required to file with the Federal Reserve Board annual reports and such additional information as the Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may also make examinations of Volunteer and its subsidiary. Volunteer is also required to comply with the rules and regulations of the SEC under federal securities laws.

The Bank is a Tennessee-chartered commercial bank and is subject to the supervision and regulation of the Tennessee Department of Financial Institutions (the “TDFI”). In addition, the Bank’s deposit accounts are insured up to applicable limits by the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) and consequently, the Bank is also subject to regulation and supervision by the FDIC. The Bank is not a member of the Federal Reserve System.

Federal and state banking laws and regulations govern all areas of the operations of Volunteer and the Bank, including reserves, loans, mortgages, capital, issuance of securities, payment of dividends and establishment of branches. Federal and state banking agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe or unsound banking practice. In accordance with and as a result of the exercise of this general authority, the Bank is currently prohibited from paying dividends without prior regulatory approval. The TDFI, FDIC and Federal Reserve Board have the authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent banks from engaging in unsafe or unsound practices.

The primary goals of the bank regulatory system are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. The system of supervision and regulation applicable to the Bank is intended primarily for the protection of the FDIC’s Deposit Insurance Fund, the Bank’s depositors and the public, rather than the shareholders of Volunteer. The following are summaries of some of the relevant laws, rules and regulations governing banks and bank holding companies, but does not purport to be a complete summary of all applicable laws, rules and regulations governing banks and bank holding companies. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed.

Consent Order, Written Agreement, and FRB Agreement; Certain Other Regulatory Requirements

On January 28, 2010, the Bank entered into a Consent Order (the “Consent Order”) with the FDIC. As is customary for orders of this type, and pursuant to the terms of the Consent Order, the Bank entered into the Consent Order without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulations. On June 22, 2011, the Bank also executed a written agreement (the “Agreement”) with the TDFI.

On May 26, 2010, the Company entered into an Agreement (“FRB Agreement”) with the Federal Reserve Bank (“FRB”). The Company is to act as a source of financial strength for the Bank. Accordingly, in this FRB Agreement the Company is required to obtain written permission before any of the following actions are taken: payment or receipt of any dividends from the Bank, payments on the subordinated debt (see Note 11) or Trust Preferred Securities, or the purchase or redemption of any stock. In addition, under the FRB Agreement the Company may not incur, increase, or guarantee any debt without prior written approval of the FRB.

The Consent Order, the Agreement, and the FRB Agreement (collectively, the “Action Plans”) contain substantially similar terms and are based on the findings of the FDIC and TDFI during their joint examination of the Bank that commenced on September 14, 2009. The Action Plans represent agreements between the Bank, on the one hand, and the FDIC and the TDFI, respectively, on the other hand, as to areas of the Bank’s or Company’s operations that warrant improvement and present plans for making those improvements. The Action Plans impose no fines or penalties on the Bank or Company.

Under the terms of each Action Plan, the Bank cannot declare or pay cash dividends without the prior written consent of certain officials of the FDIC and the TDFI (the “Joint Officials”). In addition, the Bank is restricted from extending additional credit to certain borrowers whose existing credit has been classified as “loss,” “doubtful” or “substandard” or has been charged off the books of the Bank and, in each case, is uncollected. The Action Plans also require the Bank to provide the Joint Officials 60 days prior written notice of any proposed changes in the Bank’s management, along with background information for any proposed new management officials. The Action Plans further require, at varying times following their respective effective dates, the Bank (or its Board of Directors, as appropriate) to

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The Bank is required to provide written progress reports to the Joint Officials on a quarterly basis until such time as the requirements of the Action Plans have been accomplished and the FDIC has released the Bank in writing from such obligation. The Consent Order and the Agreement will remain in effect until modified or terminated by the FDIC or the TDFI, respectively.

The Company’s management believes the Bank is in substantial compliance with the terms of the Action Plans as of December 31, 2011, with the exception of the capital requirements. The Bank has provided quarterly written progress reports to the Joint Officials through the fourth quarter of 2011. The status of the Bank’s compliance with the specific actions required by the Action Plans is discussed in further detail below.

The Bank’s Board of Directors established a Consent Order Compliance Committee (the “Committee”) comprised of a majority of non-employee directors to oversee the Bank’s compliance with the Action Plans. The Committee’s first meeting was held in May 2010. The Committee has met monthly since that time and intends to meet monthly until the Bank’s responsibilities and obligations under the Action Plans have been fulfilled.

The Bank has prepared and is implementing a capital plan. This plan outlines actions to be taken to prevent and remedy cases where capital falls below prescribed levels.

The Bank engaged an outside consultant to perform a management and staffing plan. The consultant submitted its findings and recommendations to the Bank’s Board of Directors, the FDIC and the TDFI. The Bank’s Board of Directors submitted its management plan to the Joint Officials in accordance with the timeframe dictated by the agreements. The Bank’s Board of Directors evaluated the need for an executive level officer and hired Douglas E. Rehm to fill that position. Also, the Board of Directors subsequently hired a senior credit officer during 2011.

As a result of the Consent Order, the Bank is required to have an action plan regarding liquidity. This plan includes setting a minimum liquidity ratio, maximum loan to asset ratios, and establishing contingency plans designed to identify alternative courses of action to meet the Bank’s liquidity needs. Management has made considerable progress in addressing the liquidity concerns expressed in the Consent Order, and has significantly improved the process for monitoring funds and its overall liquidity position.

In addition, the Bank’s Board of Directors has obtained additional resources to provide adequate knowledge and expertise needed for the management of its interest rate risks. The Bank’s Board of Directors has established interest rate sensitivity goals and is monitoring these levels on a quarterly basis.

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The Bank prepared budgets for its 2010 and 2011 fiscal years and submitted the budgets to the FDIC for review. The Bank also has submitted a strategic plan to the Joint Officials, and the Board of Directors evaluates the Bank’s progress in meeting the terms of the plan on a quarterly basis.

The Bank has prepared a reduction of delinquencies action plan. The Bank has submitted this plan to the Joint Officials. Important aspects of the delinquency action plan include a prohibition against an extension of credit for the payment of interest on delinquent loans, a requirement to establish specific collection procedures to be instituted at various stages of a borrower’s delinquency and specific reporting requirements informing members of management and the Board of Directors about existing past due levels.

In addition, the Bank has charged off all loans classified by the Joint Officials as “loss.” The Bank maintains a tracking report that it submits to the Joint Officials periodically. Finally, the Bank’s Board of Directors has created a Loan Review Committee to review the asset quality, concentrations and problem credits within the Bank’s loan portfolio.

The Bank has addressed all violations and contraventions of policy and has either corrected or is in the process of correcting each such violation or contravention.

The Bank has implemented a technical exception tracking system in order to monitor technical exceptions. In addition, the Bank has drafted and implemented new procedures aimed at reducing technical exceptions noted by regulators during their examinations of the Bank.

The Bank has not paid dividends since the inception of the Action Plans.

The Bank is actively monitoring and is not aware of any new extensions of credit to prohibited classified borrowers.

Management and the Board have carefully considered the impact of the Action Plans on the Bank’s current and future operations. Areas that have received additional attention as a result of the Action Plans include the Bank’s liquidity position, overall balance sheet structure, capital and earnings. The Bank has considered the impact of deposit interest rate restrictions that may impair the Bank’s ability to raise local certificates of deposit. The Bank’s earnings have been impacted negatively due to the recent regulatory criticism. One example of the negative impact on earnings is that increased FDIC insurance premiums have been incurred and will continue to be at an elevated level until the Bank’s overall condition improves.

Noncompliance with the Action Plans could subject the Bank to an array of penalties, ranging from the assessment of civil money penalties against the Bank and/or any or all of its officers or directors contributing to the violation, to a termination of the Bank’s deposit insurance for more egregious violations of applicable bank rules and regulations. The Bank’s management is not aware of any penalties that were the result of any noncompliance with the Action Plans.

The Bank’s current regulatory status also subjects it to certain other requirements of law apart from the Action Plans. For example, the Bank and Volunteer are subject to restrictions under the FDIC’s regulations governing golden parachute payments, which generally prohibit entering into and paying certain severance payments to directors and senior executive officers, without prior FDIC approval in the case of the Bank, and Federal Reserve Board and FDIC approval in the case of Volunteer. We made no such payments during the five preceding years even without the restrictions. In addition, the Bank is currently unable to submit bids to the FDIC for the acquisition of any failed banks.

Deferral of Interest Payments on Junior Subordinated Debentures

Due to the restrictions in the Action Plans on the Bank’s payment of dividends to Volunteer, and following consultation with our regulators, Volunteer exercised its rights to defer regularly scheduled interest payments on its junior subordinated debentures, relating to Volunteer’s outstanding trust preferred securities, having an outstanding principal amount of $3.1 million. This deferral began with the interest payments due September 30, 2010. Under the terms of the documents governing the debentures, the Company may defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. The regularly scheduled interest payments will continue to be accrued for payment in the future and reported as an expense for financial statement purposes. The documents governing the debentures also prohibit Volunteer from paying any dividends on its common stock until such time that accrued interest on the debentures is paid.

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The Dodd-Frank Wall Street Reform and Consumer Protection Act

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law, incorporating numerous financial institution regulatory reforms. Many of these reforms will be implemented through regulations to be adopted by various federal banking and securities regulators. The Dodd-Frank Act implements far-reaching reforms of major elements of the financial landscape, particularly for larger financial institutions. Many of its most far-reaching provisions do not directly impact community-based institutions like Volunteer with assets under $500 million. For instance, provisions that regulate derivative transactions and limit derivatives trading activity of federally-insured institutions, enhance supervision of “systemically significant” institutions, impose new regulatory authority over hedge funds, limit proprietary trading by banks, and phase-out the eligibility of trust preferred securities for Tier 1 capital are among the provisions that do not directly impact Volunteer either because of exemptions for institutions below a certain asset size or because of the nature of Volunteer’s operations. Other provisions that are likely to impact Volunteer will:

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, and their impact on Volunteer or the financial industry is difficult to predict before such regulations are adopted. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

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Bank Holding Company Regulation

In General. The BHC Act provides a federal framework for the supervision and regulation of all U.S. bank holding companies and the subsidiaries of such companies. Among the principal purposes of the BHC Act is to protect the safety and soundness of banks controlled by a corporate entity. The BHC Act provides for all bank holding companies to be supervised on a consolidated basis by the Federal Reserve Board. Consolidated supervision of a bank holding company encompasses the parent company and its nonbank subsidiaries, and allows the Federal Reserve Board to understand the organization’s structure, activities, resources, and risks, as well as to address financial, managerial, operational, or other deficiencies before they pose a danger to the holding company’s subsidiary depository institution.

To carry out these responsibilities, the BHC Act grants the Federal Reserve Board authority to inspect and obtain reports from a bank holding company and its nonbanking subsidiaries concerning, among other things, the company’s financial condition, systems for monitoring and controlling financial and operational risks, and compliance with the BHC Act and other federal laws that the Federal Reserve Board has specific jurisdiction to enforce. In addition, federal law authorizes the Federal Reserve Board to take action against a bank holding company or nonbank subsidiary to prevent these entities from engaging in “unsafe or unsound” practices or to address violations of law that occur in connection with their own business operations even if those operations are not directly connected to the bank holding company’s subsidiary depository institution. Using its authority, the Federal Reserve Board also has established consolidated capital standards for bank holding companies, which help to ensure that each bank holding company maintains adequate capital to support its enterprise-wide activities, does not become excessively leveraged, and is able to serve as a source of strength for a subsidiary depository institution.

As a bank holding company, Volunteer is required to file with the Federal Reserve Board periodic reports and such additional information as the Federal Reserve Board may require. The Federal Reserve Board also conducts periodic inspections of Volunteer and has the authority to issue enforcement actions against Volunteer.

Source of Financial Strength; Cross-Guarantee Liability. Under Federal Reserve Board policy and the recently enacted Dodd-Frank Act, Volunteer is expected to act as a source of financial strength to, and commit resources to support, the Bank. This support may be required at times when, absent such requirements, Volunteer may not be inclined to provide it. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal banking agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Because Volunteer is a holding company, its right to participate in the assets of its subsidiary upon the latter’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors (including depositors in the case of bank subsidiaries) except to the extent that Volunteer may itself be a creditor with recognized claims against the subsidiary.

The Federal Reserve Board may require a holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve Board’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the holding company. Further, federal bank regulatory authorities have additional discretion to require a holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

Under the Federal Deposit Insurance Act (the “FDIA”), a holding company’s subsidiary bank can be required to indemnify, or cross-guarantee, the FDIC against losses it incurs with respect to any other bank controlled by the holding company, which in effect will make the holding company’s equity investments in healthy bank subsidiaries available to the FDIC to assist any failing or failed bank subsidiary that the holding company may have.

Capital Requirements. Under FDICIA, the Federal Reserve Board has established risk-based capital guidelines for bank holding companies. See “Capital Adequacy.” Prior to passage of the Dodd-Frank Act, the capital requirements of the Federal Reserve Board did not apply to bank holding companies with consolidated assets of at least $500 million. However, the Dodd-Frank Act requires the Federal Reserve Board to establish minimum leverage and risk-based capital requirements for bank holding companies regardless of their consolidated asset size. These requirements may not be

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quantitatively lower than the generally applicable requirements in effect for insured depository institutions as of July 21, 2010. Moreover, the capital-based prompt corrective action provisions first implemented as part of FDICIA and implementing regulations, as discussed below, have historically applied only to FDIC-insured depository institutions rather than being directly applicable to holding companies that control such institutions. However, in light of the capital mandates of the Dodd-Frank Act applicable to all bank holding companies, the Federal Reserve Board has indicated that, in regulating bank holding companies, it will take appropriate action at the holding company level based on an assessment of the effectiveness of supervisory actions imposed upon any subsidiary depository institution pursuant to such provisions and regulations.

Payment of Dividends. Volunteer is a legal entity separate and distinct from its banking and other subsidiaries. The principal source of cash flow to Volunteer, including cash flow to pay dividends to holders of Volunteer’s trust preferred securities and to the holders of Volunteer’s common stock, is derived from dividends that the Bank pays to Volunteer as its sole shareholder. Under Tennessee law, Volunteer is not permitted to pay dividends if, after giving effect to such payment, Volunteer would not be able to pay Volunteer’s debts as they become due in the usual course of business or Volunteer’s total assets would be less than the sum of Volunteer’s total liabilities plus any amounts needed to satisfy any preferential rights if Volunteer were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, Volunteer’s Board of Directors must consider Volunteer’s current and prospective capital, liquidity, and other needs.

The payment of dividends by Volunteer and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines and debt covenants. For example, under the terms of the documents governing the Company’s junior subordinated debentures, the Company cannot pay dividends on its common stock until such time as accrued interest on the debentures is paid.

In addition to the foregoing restrictions, the Federal Reserve Board has the power to prohibit the payment of dividends by bank holding companies if such payment would constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company experiencing earnings weaknesses should not pay cash dividends that exceed its net income or that could only be funded in ways that weaken the bank holding company’s financial health, such as increasing indebtedness by borrowing.

Furthermore, any dividend payments from the Bank to Volunteer are subject to the continuing ability of the Bank to maintain its compliance with minimum federal regulatory capital requirements, or any higher requirements imposed by the Bank’s regulators, including those set forth in the Action Plans. Because of the Action Plans’ restrictions on the Bank’s ability to pay dividends to Volunteer, dividends from the Bank to Volunteer, including funds necessary for the payment of interest on Volunteer’s indebtedness, to the extent that cash on hand at Volunteer is not sufficient to make such payments, will require prior approval of the Commissioner of the TDFI and the FDIC.

Restrictions on Activities. Bank holding companies like Volunteer are prohibited from engaging in activities other than banking and activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Federal Reserve Board’s regulations contain a list of permissible nonbanking activities that are closely related to banking or managing or controlling banks. A bank holding company must file an application or notice with the Federal Reserve Board prior to acquiring more than 5% of the voting shares of a company engaged in such activities. The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”), however, greatly broadened the scope of activities permissible for bank holding companies. The GLB Act permits bank holding companies, upon election and classification as financial holding companies, to engage in a broad variety of activities “financial” in nature. Volunteer has not filed an election with the Federal Reserve Board to be a financial holding company, but may choose to do so in the future.

Acquisitions and Mergers; Change in Bank Control. Under the BHC Act, a bank holding company must obtain the prior approval of the Federal Reserve Board before (1) acquiring direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company.

In addition, and subject to certain exceptions, the BHC Act and the Change in Bank Control Act require Federal Reserve Board approval prior to any person or company acquiring “control” of a holding company or bank. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a

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holding company or bank. Control is also deemed to exist if an individual or company acquires the ability to control the election of a majority of the directors, or to exercise a controlling influence over management or policies of a holding company or bank. A rebuttable presumption of control is deemed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities and either the holding company or bank has registered securities under Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage of that class of voting securities immediately after the transaction. Our common stock is registered under Section 12 of the Securities Exchange Act of 1934. The regulations provide a procedure for challenge of the rebuttable control presumption.

Tying Restrictions. A bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or provision of any property or service. Thus, an affiliate of a bank holding company may not extend credit, lease or sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer must obtain or provide some additional credit, property or services from or to its bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended.

Bank Regulation

The Bank is a Tennessee state-chartered bank and is subject to the regulations of and supervision by the FDIC as well as the TDFI, Tennessee’s state banking authority. The Bank is also subject to various requirements and restrictions under federal and state law. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.

From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the Tennessee legislature and before various bank regulatory and other professional agencies. The likelihood of any major legislative changes and the impact such changes might have on the Bank are impossible to predict.

General. The Bank, as a Tennessee state chartered bank, is subject to primary supervision, periodic examination and regulation by the Commissioner of the TDFI (“Commissioner”) and by the FDIC. If, as a result of an examination of a bank, the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the FDIC. Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors and ultimately to terminate the Bank’s deposit insurance. The Commissioner has many of the same remedial powers, including the power to take possession of a bank whose capital becomes impaired.

The deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank pays a semiannual statutory assessment. The Emergency Economic Stabilization Act of 2008 (“EESA”) provided for a temporary increase in the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. This increased level of basic deposit insurance was made permanent by the Dodd-Frank Act. In addition, on October 14, 2008, the FDIC instituted temporary unlimited FDIC coverage of non-interest bearing deposit transaction accounts. Following passage of the Dodd-Frank Act, an institution can provide full coverage on non-interest bearing transaction accounts until December 31, 2012. The Dodd-Frank Act also repealed the prohibition on paying interest on demand transaction accounts, but did not extend unlimited insurance protection for these accounts.

Although the Bank is not a member of the Federal Reserve System, it is nevertheless subject to certain regulations of the Federal Reserve Board.

Various requirements and restrictions under the laws of the State of Tennessee and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank’s operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends,

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locations of branch offices and capital requirements. Further, the Bank is required to maintain certain levels of capital and meet additional specific requirements established by banking regulators.

Tennessee law contains limitations on the interest rates that may be charged on various types of loans and restrictions on the nature and amount of loans that may be granted and on the types of investments that may be made. The operations of banks are also affected by various consumer laws and regulations, including those relating to equal credit opportunity and regulation of consumer lending practices. All Tennessee banks must become and remain insured banks under the FDIA.

Payment of Dividends. The Bank is subject to the Tennessee Banking Act, which limits a bank’s ability to pay dividends. The payment of dividends by any bank is dependent upon its earnings and financial condition and subject to the statutory power of certain federal and state regulatory agencies to act to prevent what they deem unsafe or unsound banking practices. The payment of dividends could, depending upon the financial condition of the Bank, be deemed to constitute such an unsafe or unsound banking practice. Under Tennessee law, the board of directors of a state bank may not declare dividends in any calendar year that exceeds the total of its retained net income of the preceding two (2) years without the prior approval of the TDFI. The Bank’s ability to pay dividends without the consent of the Commissioner and the FDIC is further limited by the terms of the Action Plans. The FDIA prohibits a state bank, the deposits of which are insured by the FDIC, from paying dividends if it is in default in the payment of any assessments due the FDIC. The Bank is also subject to the minimum capital requirements of the FDIC, including those included in the Consent Order, which impact the Bank’s ability to pay dividends. If the Bank fails to meet these standards, it may not be able to pay dividends or to accept additional deposits because of regulatory requirements.

If, in the opinion of the applicable federal bank regulatory authority, a depository institution is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require that such institution cease and desist from such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be such an unsafe and unsound banking practice. Moreover, the Federal Reserve Board, the Comptroller of the Currency and the FDIC have issued policy statements that provide that bank holding companies and insured depository institutions generally should only pay dividends out of current operating earnings.

Capital Requirements and Prompt Corrective Action Regulations. The FDIC and the TDFI use a combination of risk-based guidelines and a leverage ratio to evaluate the Bank’s capital adequacy and consider these capital levels when taking action on various types of applications and when conducting supervisory activities related to our safety and soundness. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among financial institutions and their holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

FDICIA requires the federal banking regulators to take “prompt corrective action” in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under applicable regulations, a FDIC-insured depository institution is defined to be well capitalized if it maintains a leverage ratio of at least 5%, a Tier 1 risk based capital ratio of at least 6% and a total risk based capital ratio of at least 10% and is not subject to a directive, order or written agreement to meet and maintain specific capital levels. An insured depository institution is defined to be adequately capitalized if it meets all of its minimum capital requirements as described above. In addition, an insured depository institution will be considered undercapitalized if it fails to meet any minimum required measure, significantly undercapitalized if it is significantly below such measure and critically undercapitalized if it fails to maintain a level of tangible equity equal to not less than 2% of total assets. An insured depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating.

Pursuant to the terms of the Action Plans, the Bank is required to develop and implement a capital plan that increases and maintains the Bank’s Tier 1 capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio to 8%, 10%, and 12%, respectively. As of December 31, 2010, the Bank was not in compliance with these capital requirements; however, the most recent notification from the FDIC categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. The adequately capitalized classification is the result of the Bank receiving a formal enforcement action which prohibits a Bank from being

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classified as “well-capitalized” regardless of its capital ratios. Therefore, the Bank cannot be classified as “well capitalized” until the Action Plans are lifted by the FDIC and the TDFI. As of December 31, 2011, due to the continued decrease of real estate values which have caused increased loan provisions, the Bank believes it will be considered “undercapitalized” under the regulatory framework for prompt corrective action.

Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution (such as those to which the Bank is subject under the Action Plans) could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits and other restrictions on its business. As described below, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.

FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.

Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator generally within 90 days of the date on which they became critically undercapitalized.

Basel III. In December 2010 and January 2011, the Basel Committee on Banking Supervision published the final texts of reforms on capital and liquidity generally referred to as “Basel III”. Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by the U.S. banking regulators in developing new regulations applicable to other banks in the United States, including the Bank. For banks in the United States, among the most significant provisions of Basel III concerning capital are the following:

The Basel III provisions on liquidity include complex criteria establishing: (i) a method to ensure that a bank maintains adequate unencumbered, high quality liquid assets to meet its liquidity needs for 30 days under a severe liquidity stress

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scenario; and (ii) a method to promote more medium and long-term funding of assets and activities, using a one-year horizon. Although Basel III is described as a “final text,” it is subject to the resolution of certain issues and to further guidance and modification, as well as to adoption by U.S. banking regulators, including decisions as to whether and to what extent it will apply to U.S. banks that are not large, internationally active banks. In addition to Basel III, Dodd-Frank requires or permits the Federal banking agencies to adopt regulations affecting banking institutions’ capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important financial institutions. Ultimate implementation of the Basel III provisions in the U.S. will be subject to the discretion of the U.S. bank regulators, and the regulations or guidelines adopted by such agencies may, of course, differ from the Basel III provisions.

Liquidity. The Bank is required to maintain a sufficient amount of liquidity to ensure its safe and sound operation. The FDIC expects institutions to use liquidity measurement tools that match their funds management strategies and that provide a comprehensive view of an institution’s liquidity risk. The guidance further provides that risk limits should be approved by an institution’s Board of Directors and should be consistent with the measurement tools used.

Temporary Liquidity Guarantee Program. On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLGP”). The TLGP was announced by the FDIC on October 14, 2008, preceded by the determination of systemic risk by the U.S. Treasury, as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions and (ii) provide unlimited FDIC deposit insurance coverage for noninterest bearing transaction deposit accounts, Negotiable Order of Withdrawal Accounts (commonly known as NOW accounts) paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts (commonly known as IOLTA) held at participating FDIC-insured institutions through December 31, 2009. Such unlimited insurance coverage expired and was not extended under the Dodd-Frank Act. The $250,000 deposit insurance coverage limit was scheduled to return to $100,000 on January 1, 2010, but was extended by congressional action until December 31, 2012 and the NOW and IOLTA accounts are subject to such $250,000 insurance coverage limit. Coverage under the TLGP was available for the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in covered accounts exceeding $250,000. The Bank elected to participate in the unlimited deposit insurance coverage for noninterest bearing transaction deposit accounts, but declined to participate in the senior unsecured debt guarantee coverage.

FDIC Insurance Premiums. The Bank is required to pay semiannual FDIC deposit insurance assessments to the DIF. The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based upon statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the insurance fund. Recent depository institutional failures have resulted in a decline in the targeted amount of funds in the DIF mandated by law. In 2009, the FDIC undertook several measures in an effort to replenish the DIF. The FDIC imposed a 5 basis points emergency assessment on insured depository institutions which was paid on September 30, 2009, and was based on total assets less Tier 1 capital as of June 30, 2009. The special assessment resulted in additional expense of $65,426 in the second quarter of 2009. In the fourth quarter of 2009, the FDIC adopted a rule that, in lieu of any further special assessment in 2009, required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and or all of 2010, 2011, and 2012. The prepaid assessments will be applied against future quarterly assessments (as they may be so revised) until the prepaid assessment is exhausted or the balance of the prepayment is returned, whichever occurs first. The FDIC also adopted a uniform three basis point increase in assessment rates effective January 1, 2011. Because of its weakened financial condition, the Bank was not required to prepay its assessments for 2010, 2011, or 2012.

On February 7, 2011, the FDIC approved a final rule that implements a revised deposit insurance system mandated by the Dodd-Frank Act. Effective April 1, 2011, the assessment base will be determined using average consolidated total assets minus average tangible equity rather than the previous assessment base of adjusted domestic deposits. Since the change will result in a much larger assessment base, the final rule also lowers the assessment rates in order to keep the total amount collected from financial institutions relatively unchanged from the amounts currently being collected. The new assessment rates, calculated on the revised assessment base, generally range from 2.5 to 45 basis points on an annualized basis, depending on which of four risk categories the FDIC assigns to an institution based upon supervisory and capital evaluations. The new assessment rates will be calculated for the quarter beginning April 1, 2011 and reflected in invoices for assessments due September 30, 2011.

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Volunteer and the Bank are currently evaluating the impact that the new assessment base final rule will have on our financial position and results of operations. While the new system is generally expected to have a positive effect on small institutions (those with less than $10 billion in assets) such as the Bank given that, in the aggregate, the large bulk of such institutions are expected to see a decrease in assessments, the impact of the final rule, and/or additional FDIC special assessments or other regulatory changes affecting the financial services industry could negatively affect the Bank’s and, therefore, Volunteer’s, liquidity and financial results in future periods.

Interest on Demand Deposits. All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011, financial institutions can commence offering interest on demand deposits to compete for customers. The Bank is closely monitoring the deposit pricing activities of other banks in its market area, but the potential effects of this repeal on competition for deposits cannot yet be ascertained. The Bank’s interest expense may increase and its net interest margin may decrease if it begins offering interest on demand deposits to attract additional customers or maintain current customers

Brokered Deposits and Pass-Through Insurance. The FDIC has adopted regulations under FDICIA governing the receipt of brokered deposits and pass-through insurance. Under the regulations, a bank cannot accept, roll over or renew brokered deposits unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDICIA. A bank that cannot receive brokered deposits also cannot offer “pass-through” insurance on certain employee benefit accounts. Whether or not it has obtained such a waiver, an adequately capitalized bank may not pay an interest rate on any deposits in excess of 75 basis points over certain index prevailing market rates specified by regulation. There are no such restrictions on a bank that is well capitalized. The Bank had no brokered deposits during 2010. The Dodd-Frank Act requires that the FDIC submit a study to Congress by July 21, 2011, recommending statutory changes to the brokered deposit restrictions, which could impact the Bank’s future ability to accept deposits deemed to be brokered as well as any related deposit insurance premiums on such deposits.

Reserve Requirements. Although the Bank is not a member of the Federal Reserve System, it is subject to Federal Reserve Board regulations that require the Bank to maintain reserves against its transaction accounts (primarily checking accounts). Because reserves generally must be maintained in cash or in noninterest-bearing accounts, the effect of the reserve requirements is to increase the Bank’s cost of funds. The Federal Reserve Board regulations currently require that average daily reserves be maintained against transaction accounts in the amount of 3% of the aggregate of such net transaction accounts up to $52.6 million, plus 10% of the total in excess of $52.6 million.

Incentive Compensation. In June 2010, the federal banking regulators issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The Federal Reserve Board and the FDIC will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as Volunteer and the Bank, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Loans to One Borrower. Under Tennessee banking law, state banks are generally prohibited from lending to any one person, firm or corporation (including loans to a firm or loans to the several members thereof) more than 15% of the bank’s capital, surplus and undivided profits. However, the loans may be in excess of that percent, but generally not above 25%, if each specific loan in excess of 15% is first submitted to and approved in advance in writing by the bank’s

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board of directors or a committee thereof, and a record is kept of the written approval. For any situation or circumstance in which no loan limit is applicable to a national bank, Tennessee law offers the same treatment for state-chartered banks, and therefore no loan limit would be applicable to any state bank in such situations or circumstances to the same extent as a national bank.

Transactions with Affiliates. The Bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and Regulation W adopted thereunder by the Federal Reserve Board, as made applicable to state-chartered nonmember banks by the FDIA. In general, these transactions must be on terms which are as favorable to the Bank as comparable transactions with non-affiliates. In addition, certain types of these transactions, referred to as “covered transactions,” are subject to quantitative limits based on a percentage of the Bank’s capital, thereby restricting the total dollar amount of transactions the Bank may engage in with each individual affiliate and with all affiliates in the aggregate. Affiliates must pledge qualifying collateral in amounts between 100% and 130% of the covered transaction in order to receive loans from the Bank.

Loans to Insiders. The Bank’s authority to extend credit to “insiders,” which include the Bank’s directors, executive officers and principal shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board, as made applicable to the Bank under Tennessee banking law. Among other things, these provisions require that extensions of credit to insiders:

In addition, extensions of credit in excess of certain limits must be approved by the Bank’s Board of Directors.

Consumer Protection and Other Laws and Regulations. The Bank is subject to various laws and regulations dealing generally with consumer protection matters, and may be subject to potential liability under these laws and regulations for material violations. The Bank’s lending operations are also subject to federal laws applicable to consumer credit transactions, such as the: